Broadwind Inc (BWEN) 2011 Q3 法說會逐字稿

-- Conference Call. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

I will now like to turn the call over to Mr. John Segvich, Director of Investor Communications. Please proceed, sir.

Thank you. Good morning, and welcome to Broadwind Energy's third 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 news 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 in the attachments release filed with the SEC today and our Form 10-Q, which will be filed later today. 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.

Great. Thanks, John. As we turn to slide three, we tried to put the key headlines for the quarter on one page. Certainly, revenue growth of 41% over Q3 2010 is an impressive headline. The towers and services were the shining the stars of the quarter. In fact, services was up 82% over Q3 of 2010 and 180% over Q2 2011.

On the gearing side, we talked about this in the past, our gearing mix, our industrial revenue represented 63% of our total gearing revenue, and that was a 24% increase over Q3 2010. So, you can see quite a dramatic shift in the mix between our industrial revenue and our wind revenue. We'll talk a little bit about that in more detail later in the presentation. And overall, 22% increase versus Q2 of 2011, so good growth on a revenue side.

The quarter was, without its challenges -- was not without its challenges, on the operating performance side, you know, tower business, we took out a new customer, a new tower design. It cost us to have $650,000 of additional costs in the quarter. And then it also delayed the recognition of $6.5 million of revenue and also resulted in an increase in inventory levels.

Now, as we transition to this new tower, we did work through these issues by the end of the quarter, but it did have an impact on the quarter obviously. The other headwind that we've been dealing with is on the additional legal costs. We've talked about this in the past relative to what we originally thinking for the quarter. We had an additional $0.5 million of additional legal fees. But as you look at the year-to-date figures compared to this quarter to 2010, we are still slightly less than $12 million ahead in EBITDA, so I think that's a good performance for 2011.

On the customer diversification, the trend that we've been talking about the last couple of calls, we landed a new customer, put out a press release yesterday on Siemens that they're taking 36 new towers from us. So, Siemens is a branded customer for Broadwind, and they have an option for an additional 25 towers with a fairly short decision point on that option. So, that means we're roughly 60% sold out for 2012.

We're expanding other parts of the business. Our industrial weldment business is growing nicely. And we've added -- [I still think it's an] interesting data point. We added a new mining customer, that's both buying from us in gearing and buying from us in specialty weldments. So, we're seeing that our sales people are working together, cross selling and trying to provide customer's additional value. As we look at the market outlook for the future, I think the wind energy market is going to be strong certainly for our tower business. It still continues in the oil and gas, and mining gearing quite well.

Over the last five years, we've got about 28,000 megawatts of wind installations. This fleet is starting to age, these turbines are starting to come off warranty, so this is a good opportunity for our drivetrain business or tech services and blade program. And it's not -- you know, our industrial business is not just about oil and gas, and mining, we're also seeing some wins in steel and off-highway vehicle.

As we turn to the next page, page four, on the orders side, like I said, services is the shining star and had a book-to-bill of 1.12. We're seeing strong order activity in blades and tech support. I think we're also seeing some of the results from our new sales staff. So, we've added five sales staff in 2011. They're focused both at the wind farm level as well as the corporate strategic level, and we're starting to get some wins there.

On the towers side, as we've said in the past, the orders tend to be lumpy. We would expect to see a lot of the volume come through in Q4 and Q1 in 2012. The Siemens order is not reflected in any of these numbers.

And I would say that our quoting in our activity level, particularly on our tower business, is very reminiscent of the 2008 time, where there was a lot of activity. And I think part of that is in associated with the production tax credit that may expire at the end of 2012.

On the gearing side, we had some put through price increase that resulted in some purchase order that were held up, that we would normally have gotten or held up as a result of the price increase. We did subsequently signed those POs at the higher price, but that was not done until Q4.

So, if you were to -- if we hadn't put through the price increasing and we had just accepted those POs, our book-to-bill in gearing would have been 1.19. But I think it was the right thing to do as to pass through some of the material costs we're seeing.

We're still seeing strong activity in gearing, and oil and gas, and we have received the $5.9 million order in wind gearing. So, for 2012, so, the gearing market for wind is still coming along. As we look at overall backlog in history, you know, at the end of the quarter, we are at $188 million. The backlog contains 300 towers associated from an order that we had received in 2010. This will be reduced by about 200 towers in 2012 and an additional 100 towers in 2013.

So, we do expect that the backlog will start to trend down as this framework agreement begins to expire. And I really think today is that the multiyear framework agreements are over, and you shouldn't really be troubled by that, and we're going to go more and more from project to project. It will create some lumpiness in our orders, but again we do believe we're well positioned having produced the larger multi-megawatt towers.

Going to page six. I think it's graphed by the business mix. It tells a lot about what our gearing business has been dealing with and the dramatic change in our customer base from wind longer runs a few SKUs and a few parts for more variability. But the good part is that the industrial market tends to have better margins in the wind market.

We are making sure we're retooling the business to be able to deal with this greater variability of parts and larger SKUs, and we are seeing that on a Broadwind services side that we're making more and more gears for the replacement in gear box market. So, we will always have some constant demand for replacement gearing in the wind space.

The other driver in our business is really what's in construction for the future. We've seen significant uptick in activity, so over 8,000 megawatts currently in construction. So, this affects both our tower business and our service business. And the other, I think, important point is that we're seeing an increased activity in taxes.

So, a lot of activity of installs in Texas in the 2005 through 2010 time frame, and we went to a hiatus, it was almost over built, and now we're seeing a resurgence of activity there. So, that should help fill up our Abilene facility.

Going to page seven and some of the market dynamics. You can see that wind installations, both actual and forecasted, is there is an uptick. I think part of what we're seeing is the risk of the PTC expiration pulling activity into 2012. Related to the PTC is there has been a bill submitted to the House. It's got bipartisan support to extend the PTC for an additional four years. And so, that could certainly help the industry.

And the other point I would make on the wind industry is as you look at the technology that's being deployed today, so 100-meter hub heights, 100-meter rotors, so we're going higher, bigger rotors, better energy capture and is driving down the cost of energy for wind. And as bringing wind into good parity meaning it is on equal footing from a cost point of view as a natural gas and a coal. So, that should allow us to start getting closer to being able to compete with those fossil fuel based generation without subsidies, and that will allow us to control our own destiny.

Turning over to the gearing market. As I mentioned, this is a forecast of oil and gas, and mining and gearing through 2012, significant increase in 2011. It was interesting that HIS Global that the US gearing industry is staring to get more competitive with the international gear markets. And we're hearing from our customers the same thing that they had off shored some of their gearing needs primarily in Asia and now are bringing that work back to the US because of some of the issues associated with the supply chain and logistics as well as quality issues. So, that should also help growth in the industry.

The other thing that we're hearing from customers is that order-to-delivery time is elongated. And because of the phenomenon of the wind gearing falling off in our business, we ended up with open production slots. And we're trying to leverage those slots in a very strategic way to build long term relationships with these customers since there are some constraints in the gearing market today.

So, we're doing a lot, but we need to really accelerate dealing with our cost structure going forward, and that's really what we're talking about on page eight. Today, we have 1.5 million of square feet across all of our facilities.

We've developed a plan to reduce that, but approximately 400,000 square feet selling our Brandon, South Dakota tower facility. We're going to consolidate our manufacturing facilities in Chicago. We made the decision to close our German office, and we made the decision to consolidate our corporate office in Naperville with our gearing facility.

I think as you look at the gearing consolidation as an isolated move, it's a good example, the opportunity here. We've got two facilities. One is 300,000 square feet; the other is 200,000 square feet. We can fit all of the equipment into the 300,000 square-foot facility, still have enough capacity for roughly $150 million of revenue on an annual basis.

And what we've done as we've looked as some of the spaghetti diagrams, we've found that shipping product between two facilities, two miles apart, we're generating 17,000 miles a year doing that. So, labor to transport the trucks, diesel fuel, idle time, so there's a huge inefficiency of having these two facilities. And by consolidating, we're eliminating a lot of that.

So, we believe that we can say, $3 million to $4 million a year just in gearing alone on this consolidation. So, we'll be talking more about that in the future. Now, I'd like to turn the meeting over to Stephanie Kushner to talk about the financials in more detail.

Thanks, Pete, and good morning. As Pete stated, our revenue was $47.9 million in the quarter, up from a year ago. However, due in part to the mix of towers sold, we saw only a modest improvement in gross profit. We reported $700,000 of gross profit versus a loss a year ago. To date, our gross profit of $6.2 million averages 4.8% sales, a recovery from last year but still a critical area of focus.

We reported an adjusted EBITDA loss of $1.5 million in the quarter, again, an improvement from last year, but we felt short of our objective for positive EBITDA in each quarter. The shortfall is due to difficulties in our tower business for the production flow and a new tower design, and legal fees that exceeded our projection. We reported an operating loss of $6.2 million and a net loss of $0.06 per share.

I'd like to provide some framework concerning our operating leverage of Broadwind. That is the incremental EBITDA derived from each additional dollar of sale. Like most of the companies, sales mix has a major impact on operating leverage. Within our businesses, for example, incremental gearing sales, especially for industrial customers, generally provide the highest operating leverage.

On the other hand, tower sales where we provide skill plate generally provide the lowest operating leverage. We receive only a small handle in margin on the tower steel. The value add relative to the raw material cost is lower and the market is competitive. Therefore, the operating leverage on tower is at the low end of our range.

If you look at our year-over-year nine months results, you'll see that our composite operating leverage on the additional $41 million worth of sales was $12 million or about 29%. As I said, this figure can vary considerably, and we have a richer mix with a lot of fabrication-only towers in the first part of this year. So, I estimate that the composite figure in the 25% range is a pretty good one to use for Broadwind's current mix of business.

During this quarter, our operating leverage is much lower, only $1.3 million of additional EBITDA and $14 million worth of sales, or less than 10%. This is unusually low and reflects the lower margin mix of tower sales, weaker labor productivity due to the startup of the new tower design and higher legal expenses.

Turning to our segment, on the next slide, our tower business reported $29.7 million of revenue on 133 megawatts of towers. [The watts] were up very slightly from 129 last year, but down from the run rate we have experienced in the first half of 2011. Versus last year, revenue was much higher because of the inclusion of steel content on all towers produced this quarter.

In the prior year quarter, a third of our production was of towers where the customer provided the steel and we built for fabrication only. Had we also provided the steel last year, our revenue would have been about $8 million higher, and the revenue GAAP between the years would have narrowed considerably.

Notwithstanding to their similar megawatt production level, our operating income improved by $300,000 to the breakeven level. As Pete mentioned, the low rate of productivity on the new tower design cost us $650,000 in the quarter and also reduced our production in sales below plan by several million dollars. Production is running well as we speak, so we're expecting a better fourth quarter, about $32 million in sales with higher profitability.

Turning to gearing, our revenue was down 4% at $12.6 million. The shift between wind and industrial customers continues as predicted. During the third quarter, our non-wind revenue accounted for nearly two-thirds of our sales. This improved our gross margin for this business, but because of high legal expenses only about $200,000 of the improvements drops to the bottom line.

As Pete indicated, in our gearing business, we continue to focus on improving productivity and making cost reductions to drive increased margins over time. The restructuring project should boost gross margin by five to six percentage points beginning in 2013. In the short term, fourth quarter revenue should approach $14 million with some improvement in profitability.

Services recovered nicely in the third quarter with strong quarters and sharply higher revenue. We had a high of a 160 technicians deployed out in the field during the quarter with heavy activity in both tech services and blade repair. Although our drive train remanufacturing expenditure had gotten off to a slower start than planned, we did invoice our first remanufactured gearboxes in the quarter. We are working hard to translate a high level of interest in the market into financial results related to this investment.

Adjusted EBITDA was a loss of a $100,000 a significant improvement from 2010 and dramatically better than the first half of the year. Looking forward, Q4, which is seasonally weaker should also be a healthy quarter with revenue approaching $5 million and a small EBITDA loss. For Broadwind in total, we're projecting Q4 revenue of approximately $50 million and slightly positive adjusted EBITDA so that we will end the year at more or less breakeven EBITDA on about $180 million of sales.

Looking into 2012, we are expecting revenue growth in the 15% to 18% range. The incremental sales should translate into EBITDA growth at about net 25% level on the incremental sales. The next slide summarizes our operating working capital position, which rose by $5.6 million or 8.3% of annualized Q3 sales. Although we projected an increase, the sharp uptick in inventories was several million dollars higher than expected due to the slower tower throughput rate which kept more raw still on the ground and increased our working process inventory.

Our gearing business has also experienced some inventory built during the quarter. During the fourth quarter, that inventory spike should reverse, and our inventory balance should end the year closer to $20 million. On the other hand, customer deposit should also decline since we are currently delivering against these advances. All told, we expect to end the year with about $5 million of customer advances on the balance sheet and total operating working capital in the $17 million to $18 million range or 89% of sales.

Turning to the next slide, our debt position rose to $14.6 million, up $1.7 million from last quarter. The increase was linked to $2 million in net proceeds received from a new market tax credit which is a low interest subsidized loan which will be forgiven after a seven-year period. The interest rate is just above 1%.

Cash balances totaled $14.4 million at the end of the quarter, up $4 million from $10.5 million at the end of the second quarter. During the quarter, we raised $11.7 million due to sale of equity plus $2 million for the new market tax credit. That $13.7 million was used $6 million for increased working capital, $1.5 million to fund the EBITDA loss, $600,000 for restructuring expenses; $600,000 for debt payments in the balance increased our cash. At quarter end, our net debt was about $2.4 million, and our $10 million credit line was drawn slightly.

The final slide takes a step back that shows the progress we've been making to reduce debt and improve our EBITDA or operating cash flow. The red bar shows our debt balance and the blue bar shows our trend in adjusted EBITDA.

Two years ago deep in the recession, we carried $43 million of debt. Feeling the lag impact of the down wind cycle on the supply chain, we struggled in 2009 and 2010 under that debt burden while experiencing negative EBITDA. We have systematically focused on reducing that debt burden at the same time improving the cash generation from the business.

Beginning a year ago, our EBITDA reached an inflection point and while still reducing debt, our EBITDA is recovering and we are growing stronger. Looking forward, we're focused on systematically improving EBITDA. We will maintain very low debt until our operating performance is healthy and predictable.

Looking into 2012, we have taken a number of actions to improve our liquidity position. Debt service related to the $14 million debt balance will be $4.5 million due to the benefit of rescheduling $2.3 million of related party notes. Additionally, we expect to repay the $5.1 million balance that is secured by the brand in plant when we sell this property. We've also improved the availability under our Wells Fargo line. So in short, we believe our liquidity position is sufficient to support the company. Thank you and I now will turn this over to Pete to manage questions.

Thank you. (Operator Instructions).

Your first question comes from the line of Chris Blansett with J.P. Morgan. Please proceed.

Hi, Pete. Two questions for me. Number one is could you give us an update on maybe the 12-month horizon for non-wind related gearing. Do you think you've improved your horizon or your viewpoint on that from maybe last quarter?

And then the second part of it is, is how should we think about the cost savings rolling through the next few quarters? Literally, how much is in COGS versus OpEx? Those are the questions I have.

Sure. Let me start with the gearing question, Chris. I think we try to convey in the presentation the mix change or I suspect that the wind will start to kind of plateau as far as the drop-off there. And as I try to mention in my comments, we're really trying to take that capacity for the industrial businesses or the industrial gearing market and ration that to customers who can be very strategic for us going forward.

So, it's not a one-off order, but a multiple year order. So we're seeing -- as we look at it, we're looking at the oil and gas, and mining customer and helping them navigate through this somewhat of a bubble so it will improve our margins and provide kind of a stable revenue source going forward.

Chris, on the second one, in terms of the cost savings rolling through. So, of the $6 million, about $4 million of that COGS and you won't really even start seeing that until the end of 2012, I would say count on it for 2013. The other $2 million is going to come through the SG&A and that should start pretty much immediately at the beginning of 2012.

Okay. And then, Peter, I guess my question obviously the leveraging up or increasing utilization of your gearing is the lever for the company in order to improve your profitability. I'm just trying to get a feel for your own kind of expectations for improvement in non-wind gearing over a 12-month horizon at this point in time.

Well, our forecast for revenue next year across the whole businesses $60 million plus, and I would expect that 65% to 70% of that is going to be industrial. We are still going through -- as we build these customers, we're going through the qualification process.

So there's a large mix change going on, we get through the qualification, we start producing gears. So I think -- think of gearing it more than $60 million, 65% of that industrial and I think as you look at 2013, I think we're on good platform for growth because we've built up these experience with the customers, we've proven ourselves. So hopefully that's responsive to your question.

No, that's helpful. I just want to, again, get a feel for what you're thinking about. Thank you very much.

OK.

Your next question comes from the line of Aditya Satghare with Lazard Capital. Please proceed.

Great. Thank you. First question was on the continued traction you're seeing in the wind tower business. So what were the some of the key reasons behind the new Siemens order win? And could you sort of share some commentary around the discussions you're having with customers in terms of two trends which we see in the industry, which is increasing construction backlogs as well as the larger turbine sizes coming in the market.

Yes, with respect to Siemens, I mean Siemens has been a target account for us for quite awhile. Now, we're doing work with Siemens quite a bit on the service side, we've never really done a tower order with them. So, we were really targeting to try to land that as an account.

They're having very good traction here in the United States, so they were very much a strategic account for us. So it's been a two-year process, and we've finally gotten our first order and we're going to focus on certainly delivering well on that order.

And then with respect to -- what we're seeing is we are seeing this pull through of volume from 2013 into 2012 partly because of the risk around the PTC. So all of the developers are trying to get their projects done and all the OEMs are trying to line up the supply chain. So when I say its reminiscent of 2008, there's an awful lot of activity or quoting volume is way up and I suspect that we're going to lock in to most of these orders here in the fourth quarter and the first quarter and then the rest of next year will just be a matter of executing.

And then with respect to your question on the larger turbines, the GE 1.6 and the Siemens equipment and many of the other manufacturers are going to these larger rotors and very efficient machines particularly in lower wind speeds and we're seeing good demand for that equipment. So being positioned with Siemens, I think, is very important going forward and hopefully we can land some additional new customers with these larger equipment.

Great. Second question on the service business, so we saw this sequential uptick in services, can you sort of talk a little bit more about what do we -- like what is the timeframe for us to start to see large multi-year orders from Broadwind in the services business or some of the steps you're taking to achieve that.

The services business is more of a short cycle business particularly with what -- we're more of a specialist in what I call the non-routine maintenance, so I would not expect to see a multi-year framework agreement in services.

We're doing, as I said, we're doing work for Siemens. That's almost on a project by project basis. NextEra is a big customer for us. So I think what you're going to find is as we continue to prove ourselves in some of these non-routine specialized work and build a reputation on being able to deliver in a safe and on time manner that we're going to get more work and that also as we continue to make progress in remanufacturing gearboxes, but I don't -- you're not going to see a three-year frame agreement on services unless it's a -- maybe you're referring to an O&M agreement.

That's a very competitive market right now. We're still going after that. But we're fighting a bit of a headwind with the OEMs on that business. And I think the pricing, there's a lot of discounting going on, on the O&M side and we're trying to be very selective. We do not want to give our services away. So we're monitoring it very closely, but right now we're focused more on the non-routine side.

Great. Thank you.

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

Thank you. I just wanted to ask a question about the -- Stephanie, you mentioned your comments about the 2012 EBITDA, could you repeat them. You mentioned some percentages and I didn't capture it.

Yes. So what I said is that we're expecting top line growth revenue wise in the 15% to 18% range. And then that should flow through at the EBITDA line at sort of somewhere around a 25% level. That's about an average across our businesses given the current business mix of the operating --

OK. So the EBITDA margin of 25%?

No. So, no.

I wish.

Yes, I wish. No. We're sort of breakeven to slightly positive this year and I'm saying this on the kind of our incremental EBITDA on an incremental dollar of sales is around 25%.

OK.

That that should apply.

Very good, thank you. My second question is well clearly 2012 should be a strong year. But as you mentioned the long term framework contracts are expiring. We just heard from NextEra that to be conservative, they're not really expecting to build any new [in farms] in 2013 and beyond. So how should we think about earnings beyond '12?

What was -- we'll take a step back and look at our overall strategy. So our overall strategy, we talked about this a couple of calls ago was to shift our earnings model so we're really only 50% dependent on new US wind installation and that's why we're busy diversifying both in our gearing. And then in our service business to be more linked to the install base of wind farm; and then in our tower business, on the special weldment side.

In 2012, that number is going -- on a revenue side is going to approach 40% of non-wind revenue. And in fact, relative higher profit contribution, so it's actually a little bit better for us than that. Now, the idea of nothing in 2013, that's a pretty draconian point of view. Even in towers, we do have a base load. We have a 100 tower base load of orders in 2013. And we're watching this legislation, how that is going through. We think that could -- certainly change the whole picture.

Right. And just to elaborate a little more on that. So gearing has diversified really well. So a lot more industrial. The services business is focused on the install fleet, so new installs doesn't really hit that too much. There is some construction support that we do. And then obviously the wild card is towers, as Stephanie mentioned the 100 towers is already in our backlog and this -- we don't talk a lot about the specialty weldment business but its non-wind, large structures, mining and oil and gas so we're seeing some growth there. I think in my comments I said it was approaching for 2012 $10 million and we would see for 2013 further growth non-wind.

So that is helping fill up part of our Abilene facilities going to be dedicated to non-tower welding, so mixed use facility. And we're going to be working hard to -- in 2012 to continue to diversify that business. So we are cognizant of the potential downturn in 2013 and making sure we're working hard to diversify.

Great. Thank you.

(Operator Instructions)

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

Thanks for taking my questions, just a quick one if I may about the services segment. This year service revenue base under Q4 guidance said to be down about 20% or so from last year even though installations are actually up maybe 20%. How should we think about the trend and services relative to the size of the overall -- of the underlying market?

If we look at -- we're gaining some good traction in our tech service particularly our non-routine maintenance activities and we're doing some -- making some good progress in blade work as well. So we're expecting 2012 to be back in the $20 million plus run rate.

$20 million plus assuming what level of installations? Or does not really matter for you?

Yes, it does matter. We could end up with -- we see an upside. There could be kind of surge in the fourth quarter. A lot of that depends on what ultimately is happening with this production tax credit. So we're maybe being conservative with $20-ish million.

Yes.

So a lot of it is going to unfold as the politics unfold.

A lot of the work that we do is on the install base in --

Yes.

On new installs.

Yes. Can you tell me what percentage of your Q3 service revenue was O&M as oppose to new installs?

Its probably 75% on the install base.

Yes.

Maybe 25% new installs.

Okay. Thanks very much.

Yes.

With no one else in queue for question, I would now like to turn the call over to Mr. Peter Duprey for CEO for any closing remarks. Please proceed.

Great, thank you. Just a few closing comments. We continue to make progress in the turnaround and transformation. We're very focus on the front end of sales side of the business; we've added nine sales people in 2011 to really go after the diversification plan.

We're making sure we got the management systems in place so that we can scale the business profitably going forward. We've talked about the restructuring plan to get our cost in line. So we've been navigating through some difficult waters in the wind market, but we're making it through the storm and we see light on the horizon. I do thank you for you your interest in Broadwind and look forward to sharing our results next quarter. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Great day.