Broadwind Inc (BWEN) 2011 Q2 法說會逐字稿

Good afternoon. My name is Bonnie, and I will be your conference operator today. At this time I would like to welcome everyone to the Broadwind Energy Second Quarter 2011 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)

I would now like to turn the call over to Mr. John Segvich, Director of Investor Communication. Please go ahead, sir.

Thank you, Bonnie. Good morning, and welcome to Broadwind Energy's second 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. This morning's earnings new release is available on our website at bwen.com. 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 and the attached news release filed with the SEC this morning, and our Form 10-Q, which will be filed later today. 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, and thanks for participating. On today's call I'd like to summarize the highlights of the quarter, discuss our progress against some of our key objectives that we set out at the beginning of the year, and then I'll turn the meeting over to Stephanie Kushner, our CFO, for a more in depth review of the financials.

Q2 was a good improvement over the same period last year, as we focused on transforming Broadwind Energy. Revenue was up 17% driven by our Tower business. Our Gearing business achieved a milestone (inaudible) our industrial revenues significantly exceeded our wind energy revenue. Order intake for the quarter was $22 million, compared to $9 million for the prior year.

In our Gear business, orders were $16.7 million, which translated to a 1.3 book-to-bill. In services, orders were 3.5 million, which translated to a 1.5 book-to-bill. Orders in towers, as you know, tend to be lumpy on a quarter-by-quarter basis. EBITDA was positive for the quarter, which was an improvement of $3.3 million over the prior year. This is our third consecutive quarter of positive EBITDA.

The quarter was good over the prior year, but I still believe we can do better. Our Gearing business had $1.7 million of revenue shift to Q3, due to production through-put issues, and a customer requested delivery date change.

Our Service business had $600,000 of revenue that we were anticipating in the quarter, but POs were received too late to have a significant impact on the quarter. This contributed to our Gear and Services businesses having lower revenue compared to the prior year. I'll now talk about some of the highlights for each of the businesses.

In Gearing, we have been managing against the headwind of declining gear demand from our two major wind energy customers. Wind gearing revenue declined from a high of $19 million in Q4 2008 to $5.2 million in the current quarter. Conversely, Industrial revenue has been growing from a low point of $3.6 million in Q1 2010 to $7.5 million in the current quarter. We have added three new sales people in 2011 to our Industrial Gear business.

We are seeing very strong lead generation. Now, it takes time to ramp up a new customer. We usually go through a capabilities qualification process, and then a first article qualification. We typically start with one part, and then we grow the relationship as we prove we can produce to the specified quality levels, and deliver on time. With the mining and oil and gas industry growing at 20%-plus, I still remain confident that the Gearing business has strong growth prospects.

Turning to towers. The Towers business was a shining star for the quarter. The fact that our Towers business was able to increase revenue 48% while many in the industry are showing revenue decline, I believe it is a proof point that we are focused in the right areas. We have said before that our strategy was to focus on larger multi-megawatt and 100 meter towers.

About a third of the towers produced in the quarter were of the 100 meter tower variety. The whole industry is moving to larger machines, and higher towers. Given some of the issues that our competitors have had in transitioning to the larger towers, I believe we're seeing the benefits of our original strategy.

The market is difficult, but we are winning business. There continues to be good activity in the Midwest for wind energy projects. The business is very regional, but I believe we are winning business, because we have demonstrated we can build a quality tower and deliver on time.

With respect to services, the quarter was disappointing in the services business, with a delay in getting some POs that we were expecting in early Q2, and the market-wide delay in getting gearbox oil that shifted $300,000 of oil change revenue into Q3. We have received a $1.5 million order for blade work, and a $1.6 million order for technical support that will be provided in Q3. So, although Q2 was disappointing, Q3 is shaping up to be close to a $5 million quarter.

Our Blade Service business is down from the prior year, due to some large blade remediation work that was occurring in 2010. However, we continue to work with owners to emphasize the need for a regular maintenance program for blades.

I am happy to report our drivetrain service center is gaining traction. We have more than 20 gearboxes in various stages of remanufacturing for a number of customers in the wind and industrial markets. Admittedly, the ramp up has been a bit slower than expected, but we are really encouraged about the potential. Turn the next slide.

Our backlog is comprised mainly of tower orders. Our backlog remains steady as we shift from (inaudible) orders by project. For year-to-date orders to be almost 3X 2010, I believe is a very positive data point for the business. The activity level is certainly picking up from 2010, both on a quarterly and year-to-date basis. Turn to the next slide.

At the beginning of the year we set out four fundamental areas we were going to focus on. Diversity of our customer base. As I mentioned on our last call, diversifying our customer base in Towers and Gears was a priority. The Goldwind order certainly was a good start. In Q2 we did pick up a $5 million gearing order from our off-highway vehicle customer that helps us further diversify our customer base and our industry exposure.

Improving profitability. I think selling the Logistics business was a good start. We are focused on improving utilization and reducing the number of facilities. We are contemplating selling our Brandon, South Dakota idle tower facility, and reducing our manufacturing footprint in other ways. Our financial performance is improving, but we recognize we still have a ways to go.

With respect to rebalancing our sales mix between wind and industrial, the gear business is doing a good job of growing the industrial base. We had $13.3 million of industrial orders in Q2, our Specialty Weldment business represents all industrial customers, and they generated $1.5 million revenue to-date, which is double 2010.

And, finally, being more customer centric. In total we have added seven sales staff. We have implemented salesforce.com to better capture feedback from our customers. And we have instituted a weekly call to discuss customer opportunities, and to help grow the top line in a profitable way.

As we look to the future, the macro landscape is reasonably good. We have concerns regarding the regulatory environment for wind energy, and whether the policies in Washington will help hinder or help business growth. As a result, we need to ensure that we are managing our own destiny.

Our current focus is on diversification and cost reduction to help control our future. So we continue to make progress in turning around the business, maintaining a positive EBITDA for three quarters has been a first step, and now we are managing to profitability.

I will now turn the meeting over the Stephanie, who will cover the financials in more detail.

Thanks, Pete, and good morning. I'll start with comments about the consolidated results. Turning to the next slide. Revenue at $39.3 million was up 17% from last year. This improvement fell short of the guidance we gave the last quarter due to some production difficulties, which delayed about $3.8 million of revenue into the third quarter. Additionally, our services orders firmed up later than we expected, depressing their Q2 results.

Gross profit at $2.9 million, or 7.5% of sales, remains problematic due to low capacity utilization and pricing pressures in the competitive wind market. However, it has recovered significantly from last year, and remains a clear area of focus for the Company.

EBITDA was again slightly positive, at $100,000, versus a $3.2 million loss a year ago. And the operating loss was $4.3 million, or $0.04 per share. Last year's $12.2 million loss included a $4.6 million intangible impairment within our services group.

Turning to our segments on the next slide, our Tower business posted strong Q2 results. Production at our Manitowoc and Abilene power plants was more than double the run rate from last year, and up slightly from the first quarter. We believe this represents about a 20% market share on US megawatt wind installations for the first half. Revenue was up only 48% because of our customer mix.

More towers were produced this year where the customer provided the steel, and we were paid for fabrication only. Due to this relatively richer margin mix, we recorded EBITDA of $4.1 million for the quarter, or nearly 17% of sales; dramatically higher than the second quarter of last year.

Looking forward, we have a further $60 million of towers sold for the second half of the year, and we have some open production slots late in the fourth quarter. Our results should continue to be solid, although the mix, and therefore, the margins, will be less rich in the back half of the year. Work at our Abilene plants has fallen off, and we are looking to be producing some heavy weldments for industrial customers in this plant in the back half of the year. Next slide, please.

Wind gearing sales were down for Brad Foote, to less the year ago quarter. As Pete stated, both our key wind customers are reducing their off-take. As we said previously, we are gaining ground with our strategy to shift our sales focus to non-wind customers. As you can see on the chart on the bottom right-hand corner, industrial gearing sales have grown to now exceed our wind gearing sales.

On a favorable note, this improved our margins modestly, and more importantly, orders from these non-wind customers totaling more than $13 million in the quarter. So we expect to continue to ramp up this business, which should improve our capacity utilization and raise gross margins over time.

The operating loss was unchanged from the prior year at negative $2.8 million on lower volumes, although EBITDA improved modestly. I should also note that we incurred an unusually high level of professional service fees in the quarter, about $700,000 associated with resolving the environmental matter at Brad Foote.

Looking forward, we have about [$26 billion] of gearing orders in our backlog for the second half of the year, with the potential of some additional revenue should order intakes continue strong. EBITDA for gearing should be modestly positive in the second half of the year.

Turning to the next slide, second quarter financial results for our Services business were disappointing because we did not achieve the revenue we expected, and for which in some cases we had staffed. This is our shortest order cycle business, which is one of our challenges, with little in the way of backlog.

As we've stated in our strategy discussion, we are working to shift this business model to one where we have a significant share of steady base load business linked to the installed base of about 23,000 US wind turbines, of which about 4,500 are coming off warranty during the next couple of years.

We made a little progress with our backlog in Q2, with orders of about $3.5 million, extending over the next two or three quarters. However, with Q2 revenue of only $2.4 million, our margins were negative, and we recorded an operating loss of $2.1 million, and negative adjusted EBITDA of $1.7 million.

The next slide summarizes our operating working capital position, which rebounded to $10.3 million, or about 6.5% of annualized Q2 sales. This was not unexpected, as I said in March, our very low working capital level at March 31 was anomalous. We expect the working capital level to increase further in the second half of the year, as we deliver against some big power contracts, and utilize a portion of the customer deposits.

Turning to the final slide, our debt position remains modest, $12.9 million at June 30. Shortly after the quarter closed we did receive $2 million in net proceeds from a new market tax credit financing associated with our drivetrain service center investment in Abilene.

It's a low interest government subsidized loan, which will be forgiven over a seven year period. The interest rate is just above 1%. It will show up on our balance sheet as debt, but as you can see, the terms are very favorable. At quarter end our net debt was about $2.4 million, and our $10 million credit line was untapped.

Looking forward, we see the need for increased working capital to support the shift in our business model. Within our Tower business customer advance rates have declined. In our Gearing business, the shift to industrial customers means a shorter production run, and higher levels of -- with inventory. And in Services, successful build out of our drivetrain service center means adding to our inventory of on-the-shelf gearboxes.

Consequently, we are working on ways to increase our liquidity cushion. Options include improving the availability under our current receivables program with Wells Fargo, and entering into some additional capital lease financing. Additionally, today we have filed a plain-vanilla shelf registration, which we plan to keep on file in the event that at some future date we would wish to issue registered securities of some type. We have no current plans at this time, but feel that maintaining an effective shelf registration is a prudent move in this environment.

Thanks. And now, I'll turn it over to Pete to manage questions.

(Operator Instructions)

Our first question comes from Sanjay Shrestha of Lazard Capital

Thank you. Good morning, guys. I've got a couple of quick question here. So, can you put it in context in terms of the attraction that you guys getting on the tower side of the business versus the industry dynamics, and what could we expect going forward? And what are you seeing some of your competitors doing in response to some of the tractions you guys are seeing here?

I think on the tower side, I think you're seeing some interesting dynamics. We've been building the multi-megawatt 100 meter tower for well over a year.

Yes.

Because of the thickness of the steel walls, some of the complexities, in particular in the base sections, I think we've already navigated through that. As we're -- we've built an awful lot of towers for multiple different players, and we've build a lot of Gamesa towers and Vestas towers of the 100 meter variety, which I said in my opening comments.

I think we're very well positioned to capitalize on the tower side. And we are seeing that some of our competitors are struggling a little bit as we transition to these bigger towers. We've got proposals into all the major players, added this shift from the OEM point of view to the larger towers is happening. And although we don't have an order in hand, I think we are getting good responses from them on the proposals that we've submitted.

I think the towers actually, in the near term, I think, is actually looking quite good right now.

Got it.

I think as you might recall, all our equipment is sized for the larger multi-megawatt towers. We kind of went into the game later than some of the other players, and consequently, that's really where we focused it, and that's how we invested in terms of our plan.

That's kind of where the market went, and that's how that ended up being a pretty positive thing for you guys?

Yes.

Okay. Two quick questions for me, then. One on the -- basically on your Industrial Gearing business, which I guess is a bit of a natural hedge for you guys. How should we think about sort of the bookings outlook for that segment of the business?

And another question is, with a lot of turbine coming off of warranty next year, how should we think about your Service business? Where could that go? And at what level we can sort of think about that business sort of standing on its own, kind of being breakeven, and then eventually profitable? Thank you.

Let me start with the Service business. We've got roughly 4,500 turbines that are coming off warranty in the next really two years. So we had a big rise in wind installations in 2008, 2009. And so, yes, a lot of turbines are coming off warranty. You're going to have -- as the fleet starts to age, you're going to have more of non-routine maintenance, which I think has historically been our sweet spot.

So, we are seeing that the OEMs are getting more engaged on the service side locking in customers to longer term service agreements, but I think we can -- because you have such a number that are coming off warranty, we can have a pretty good business if we can win a couple of accounts, and then continue to focus on the non-routine side, which typically has pretty good margins. I think, we believe that the Service business is going to be a high growth opportunity.

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

Operator. Thank you. Our next question comes from Chris Lancet of JPMorgan.

Good morning. Peter, I wanted to ask about your expectations for seasonality this year for the Towers business. Should we expect something similar to past years?

Maybe -- I'll answer that one. We do have $60 million in our backlog for the back half of the year right now, so it's going to be probably less dramatic than you've seen in the past. We do have some open slots for late November and December. So depending upon whether there's a little flurry of activity, might be able to do a little bit more than that.

And then, I guess, Stephanie, as a follow up, is there kind of a drop dead timeframe some time within Q3 that you would have to have those orders in to get the towers out by the end of the year?

Some of our customers actually provide -- the lead time issue is procuring steel.

Right.

So, if we have to procure steel, I think it's about a four month, or maybe even longer, lead time. So, we're in that territory right now. But some of our customers do have steel or can move steel around, and that has happened for us before kind of late in the year.

Okay. And then, I wanted to ask about the thought process of incremental revenue on the non-wind gear business. Should we kind of just view this as a slow and steady progression? Is there any historical seasonality in that business? How should we think about this?

I think on the non-wind gearing, it is really being driven by the oil and gas market, and the mining markets. I think -- you're seeing some very healthy growth rates in those industries, and they're really asking us to do more. So as we start getting involved with new customers in oil and gas and mining, those customers can ramp up pretty good. There's one large oil and gas customer -- two years ago we were doing about $1 million to $2 million with them.

Today, I think for this year, they will be a $12 million account. I think that's an example of how these accounts can kind of grow over a couple of years. So we really do see with oil and gas booming, mining booming, we really see that being the growth driver for the Gearing business over the next couple of years.

Peter, I don't know -- has there been any seasonality in that business? I don't know if you guys are too kind of early into the ramp up to really even see that. I didn't know if there were typically heavier or lighter seasons throughout the year.

Not really, they pretty much -- they try to level load their plants, much like the auto industry. And so, I would say we have not seen a seasonality with those customers at this point.

And then the last question for me on that kind of oil and gas market is, what kind of ball park do you give on your penetration into that area? Are we -- is it below like 5%? Is it kind of a 10% penetration? I think it's difficult for everybody to figure out what you're longer term opportunity in this area is, and so I'm trying to get some reference there.

Right now we are less than 5% penetrated into that market, but as you look at some of the big players, like NOV, Weir, Gardner Denver, they're buying between $20 million and $100 million in gears every year.

So just -- I think if you looked at the top players in the oil and gas, so we're talking primarily mud pumps and frac pumps, it's -- from the data that we've pulled together with the top players, it's about a $600 million market, and we have a very small part of that now. Some of it's in-sourced, but we still see a lot of good growth opportunities in that market.

Are any of these large potential customers buying their gears offshore, and since, obviously, the dollar's weak this is beneficial for you guys in the future?

That's actually a very interesting question. We've seen actually some accounts have gone offshore, particularly China, and then have come back to us a year later and said, we didn't really have a good experience. Can we re-engage on gear qualification? So, particularly this is a fairly -- when you're putting into a drilling pump and you've got a lot of people and resources out there, the last thing you want to be is shut down because your gearbox broke.

So I think quality is important, and I think that's one of the things that we're selling. We're sourcing our raw stock from very high quality casting players in the US. We have the quality levels, and the measurement tools in house to make sure we have a quality gear. That is really what we're selling, and we're not trying to compete on price. We are getting good feedback from that market segment.

Thank you, very much.

Okay.

Thanks.

(Operator Instructions)

Our next question comes from Angie Storozynski of Macquarie.

Thank you. I had a question about -- well, actually two -- one about the changes in your working capital, and a statement that you, Stephanie, made that given the shift in your business makes there's going to be more of a need for working capital. Could you actually expand on that? And is that related to the potential needs, or there's no financing? Or, is that just simply the late recovery in the wind market?

You know, when we look at our working capital, we -- I'm sort of planning on the basis of having my operating working capital anywhere between 6% and 12% of revenue. And a lot of that depends on timing, and size of customer deposits in our tower business. And, frankly, the timing on paying for steel -- the extent to which we get terms on steel. So, I kind of look within that band.

As I'm looking out to year end, I think our working capital will be a couple of million dollars. It's not a big number. Our receivables are a little high right now, and our inventory's a little high, because we didn't get some stuff out that we expected to get out. But then our customers' deposits are likely to come down. But I'm really just looking at a band, and I want to make sure I've got ample liquidity as we sort of vacillate within that range.

Okay. That's fine. Now, about the Services business. Are you seeing any delay since servicing of the existing wind farms? And you mentioned that there was some contracts that you hoped to have locked in the second quarter, and yet they were pushed out into the third. Is that a trend that you're seeing, that the operators of wind farms are simply trying to cut down on their maintenance spending?

No, I think it was more -- so we go, we bid on these RFPs, and we're awarded the RFPs, and then you start to plan for it. But at the end of the day, you have to wait for the contract and the PO to be received, and I think there were just some delays in receiving that. And so, I think because it's such a short cycle business -- you bid these, and it's almost a week later you have to deploy people. So, it really is a resource management issue.

And I think all it was, was administrative -- their sense of urgency, and maybe our sense of urgency aren't quite aligned, which is why some of that shifted from Q2 to Q3. The data point that I look at is some of the orders that we received late in Q2, and the blade order, and the technical support order, that's a $3 million order that will be completed in Q3. I think that kind of shows how short cycled that business really is.

And then, the other headwind in Services that I mentioned was the fact that we could not get oil. So, we have these specialized oil trucks that we really want them to run full out in typically Q2, Q3 and Q4, and when we couldn't get oil, that slowed us down. I don't think the delay that we saw in Q2 on revenue is any fundamental shift in the industry.

Okay, thank you.

Operator. Thank you. Our next question comes from Pavel Molchanov of Raymond James.

My question -- just a few quick ones. On the fabrication only towers, how much is that of a discount relative to the traditional product?

Steel -- the value of steel in a tower is about 60%-ish of the price.

Okay, got it. And then, you previously said, I think three months ago, that the Goldwind 70 tower order would flow through in the second half of the year. Is that still the case? And do you have any additional granularity on which quarter it's going to be?

Yes. We're producing those towers today.

And the revenue will be recognized (inaudible) through the second half, or --?

Q -- well, it just started, so Q3, and partly in Q4.

Very good. That's it for me. Thanks.

At this time there are no further questions. I'll turn the call back to Mr. Peter Duprey for closing remarks.

Let me just wrap up that I continue to spend a lot of time with customers, both on the industrial side and the wind side. Our oil and gas customers are running flat out. They're asking us to do more and more all the time, and I do believe that that's going to be a very good growth opportunity for us going forward.

As we mentioned on the tower side, I think we're very well positioned on the tower side to pick up some incremental work, particularly as there's somewhat of a horse race to get projects done in the balance of this year, and in 2012 before the PTC sunset occurs. In my travels around talking to customers, I am very positive about the opportunity here. And I recognize that we need to continue to manage to profitability.

We are looking at how do we reduce the number of facilities, how do we reduce costs, like scrap, and things like that. We are very focused on that; we understand that, but I think also making sure we're getting the growth. And I think we are well positioned, and I am very optimistic about the future.

So, without further ado, I guess we'll wrap it up. Thanks for participating.

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