Broadwind Inc (BWEN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Broadwind Energy Earnings conference call. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

I will now like to turn the call over to Mr. John Segvich. Please proceed.

Thank you. Good morning and welcome to Broadwind Energy's Fourth Quarter 2011 Earnings Conference Call. With me today are Broadwind's presidents 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 dot com. The 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.

Also, we'll 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 released filed with the FCC this morning. And our Form 10-K, 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.

Thanks, John. Good morning, and thanks for joining the call. We'll start out on slide three. This morning, we reported solid order volume up 7% and revenue up 16% compared to Q4 2010. On order flow, our Tower segment had $50 million worth of orders in Q4. Primarily a result of the PTC expiration and accelerated some orders in 2013 into 2012.

We also picked up two large orders from a new OEMs. On the Gearing and Services side, we see a strong order flow. And we'll talk about that more later in the call. On reported revenue, we were up 16% over Q4 2010. Gearing was up 13%. We are $11 million of industrial revenue and $5 million of wind revenue. You can continue to see the shift from wind to industrial.

On our Services business, revenue was up 55% related to great field service and some specialized delayed improvement [flip] programs that were implemented earlier in the year. On Towers, revenue was up 14%. There's a little bit more to that story. In Q4 2010, roughly half of our towers were fab owned. What I mean by that is the customers procured the steel. With steel representing about two-thirds of the cost of the tower, it's going to have a fairly significant impact on our financials. In Q4 2011, all of the towers had steel content in them. So we were procuring the steel. If you look at the actual production, we were actually down 22% in Q4 2011 compared to Q4 2010.

As we turn to EBITDA, we had a loss of $1 million versus $3.9 million in Q4 2010. One of the main drivers of this was the lower production in towers. Also in towers, we had an unfavorable labor hours per tower and a one-time worker's comp adjustment. In Services we had some higher expenses for safety and training class and some one-time expenses associated with winding down a large blade project early.

While near-term profitability was impeded, task flow from operations was positive. Turn to the next page. I joined Broadwind a little over a year ago. Shortly after I joined, we focused on core objectives for the year. First was industry diversity. In 2011, we had a 152 million of orders. Of that, 54 million were non-wind orders, which represented 33% of our total order intake.

In Gearing, looking forward we expect that orders for industrial would be about 90%. But also in 2011, it had a $7 million worth of welding orders. I think relative to diversifying away from wind, I think we're off to a very good start. In customer diversity, we added three new wind customers in 2011 representing the 80 million in new orders. We added six new accounts that were greater than $1 million. These are really the seeds of growth of the future to start to qualify with these customers and grow over time.

Relative to profitability, we talked the last time about our restructuring plant. Where we're expecting to save about $7 million a year. During the year we sold our logistics business in April. That saves us about $3 million on annual basis. We improved our gross profits margin by 2.5 points from the prior year. These are early signs of our efforts to reshape the business model. We still have a long way to go, but I believe we've made some very good progress.

Relative to customer intimacy, we've added eight new salespeople. We've expanded our program management staff. These are the people that are the liaisons between the customer and production and operations people. One point of contact. I think our order volume and our order progress is really a good example of some of these initiatives.

Go to the next page, we'll talk about orders and backlog. The chart on the left shows Q4 2011, and then the results for the full year. For the quarter we were up 7% from the previous quarter -- from the quarter in the Q4 2010; and 42% for the year. I think these are really good results. Looking at Services. Although it's small, more than tripled their orders. Associated with really blades and technical support.

I would say that our drivetrain service center is taking a bit longer than we had anticipated to get traction. But we're still optimistic about the future, particularly when more wind turbines come off warranty. In Gearing, orders were 2x over 2010, driven primarily by mining, and oil, and gas. We continue to win back industrial customers.

Looking at the Backlog, Gearing represents about six months of sales. On towers, the backlog is $161 million, $123 of which will be shipped in 2012. The remaining tower backlog is approximately 100 towers; will be shipped in 2013. Now over time, we're going to -- the model is going to evolve from really a frame agreement. We still have one frame agreement left. As that continues to burn down, we expect that our backlog will start to portray roughly six months worth of future sales.

Go the next page. I think this also conveys some of the efforts we've had in diversifying our backlog. If you look at 2010, one customer represented over three quarters of our backlog. In 2011, that customer was a little more than half. It has added two new customers. You can see the growth in Gearing and the decline in wind gearing. Again, we're getting good industry diversification as well as customer diversification.

One of the main drivers in the wind industry and certainly in our business is the price of natural gas. In some cases natural gas is a compliment to wind, but also a competitor. Because it's natural gasses; and it's combined cycle gas plants are flexible enough to be able to allow wind on the grid.

What this graph shows it the disparity between natural gas prices around the world. Historically, they had traded in tandem. But horizontal drilling in the US has created some new gas lines and has really created some excess supply. Now, I would expect over the mid-term that liquefaction terminals can be built to liquefy the gas and ship it around the world.

Also, if you look at the price of oil today. It's about $18 [a million] BTU. Compared to natural gas today, which is about $2.50 [a million] BTU. So, I think that's one reason we're starting to see a lot of interest and a lot of talk about natural gas powered vehicles. I guess the point is that over the mid-term I would expect that there will be a shift to using natural gas in other ways. Either shipping it internationally or using it an alternative that will increase the demand and increase the price. I do expect natural gas prices to rise over the mid-term.

The other major impact to the business is the production tax credit and the regulatory environment. The PTC is said to expire at the end of this year. Now we've been participating in the industrywide lobbying efforts for an extension. Now, our trips to Washington; there is bipartisan support for an extension. But, we all know that Congress has not acted to date. We tried to get a PTC extension attached to the payroll tax bill. But we were not successful. At this point we are less confident that Congress will act on the PTC extension before the end of the year.

Some of the things that we're doing about it. We are part of the Coalition of Wind Tower Producers that have petitioned the US government to investigate that something in subsidization of Chinese and Vietnamese wind tower imports.

We can't predict the outcome of this petition. But we are confident in case. If we do prevail, we think there will be a significant reduction in the number of imported towers. Additionally, we have shifted a portion of our Texas power capacity to weldings. We see the weldments business being a nice growth engine for the business going forward. Then finally, we secured first time orders with leading OEMs in 2000. We secured them in 2011 to deliver in 2012.

I would say that we now have the best customer diversification in history of our Tower business. This should allow us to get a reasonable share of whatever our market is in 2013. I thin this positioning with new customers is very important to the business. As we look at the graph on the right. Trying to estimate or portray what we think 2013 might look like from a megawatts point of view.

If you use [just 3S] predictors of future you end up with this sort of a worst case based on prior PTC expirations of about 2,500 megawatts. If you look at the RPSs that are in place today around -- for each of the states, you could be closer to a little over 4,000 megawatts. We think it's somewhere in that range. We think that if there's even at the lower end of the range, we can still garner.

Particularly with some of the backlog we already have in 2013, we can garner our reasonable share of the market. That will be enough to level load our production facilities for 2013. Then also, as we diversity into weldments, that will also help the financials for the power business.

The next page with the industry diversification. The green bar represents new wind installs. That would be towers, services for new installations, as well as gearing for new installations. The blue bar represents industrial business, so non-wind business and services on the installed fleet. We can see the dramatic change. In 2010 over 90% of the business was related to wind. As we look at 2011 orders, over 40% of the order intake was really non-wind related. Then as we forecast into 2013, we believe that over half of the business can be industrial or services on the installed fleets.

I think the transformation of the business to a better balance between wind and industrial revenue is happening quickly and happening faster than I would have expected. As we turn to our deliverables for the remainder of 2012 and '13. Starting with our gearing business, the plant consolidation is very important. We are progressing well with the consolidation. We would expect it to be completed in Q1 2013. We continue to work with industrial customers primarily in oil, and gas, and mining. We are making sure that the customer experience is positive relative to on time delivery and quality of the product we make. We also expect to expand our industrial gearbox capacities.

We used to make completed gearboxes previously. We want to resurrect those products going forward. As we turn to our towers and weldments business, it's all about execution. The leveraging the contracts that we want in 2011 and delivering quality tower on time. We continue to look strongly at the mining market for the weldments business. I must say, I think I'm seeing as I talked to customers, a manufacturing renaissance.

There's more and more manufacturing coming back to the US They need suppliers with strong capabilities, both in quality and the management systems. I think that's one reason we are winning some of this business. Because I think we have a quality product. We have a management systems in place to do some of this heavy equipment. We also need to sell our South Dakota plant. There seems to be quite a bit of interest in it, although we haven't closed on anything yet.

In services, it's a similar story. We won some major customers in 2011. We need to deliver with those customers in 2012. We continue to expand our blade and drivetrain offerings. We have started to look at Turbine enhancements or turbine performance programs. Making the turbines better and generating additional megawatt hours for the customers. We are all very focused on profitability and cash flow. We know that is a very important metrics going forward. It's key to our success in being able to generate just positive cash flow in the business. That concludes my remarks. I will now turn it over to Stephanie to talk in more depth about the financials.

Thanks, Pete, and good morning. I will add some color to Pete's comments on the summary of financials. For the full year, Pete touched on the gross margin improvement to 4%. As he said, progress, but we still have a ways to go.

The reduction in operating expenses was also significant. In 2011, our reported operating expenses declined 9% from $30.3 million to $27.6 million despite a 36% jump in revenue. Within that $27.6 million figure was a $2 million benefit from reduced amortization, which resulted from the 2010 impairment. However, our legal and professional services expenses spiked. Driven mainly by our 2011 environmental investigation at Brad Foote. We were higher by $2 million.

Setting these two items aside, we in essence funded the increased cost of the expanded sales organization. Covered $440,000 of restructuring costs. Still brought down our operating expenses by nearly $3 million. As you'll see in a later slide, with some of the restructuring benefits kicking in already this year, we are projecting a further reduction in operating expenses to about $25 million to $26 million in 2012.

Our adjusted EBITDA was a $1 million loss for the quarter. We had forecast positive EBITDA, but experienced lower labor productivity in both towers and services. And some unforeseen safety and training costs; and bad debt expense.

Turning to the next slide. You'll notice that we have renamed the segment. Previously Towers, we're now calling Towers and Weldments in view of the diversification focus and the build up of our weldments business. The Towers and Weldments recorded revenue of $34.6 million in the quarter, up from 2010, but as Pete noted, the true activity level in terms of powers produced was actually down 22% from last year's record quarter. The chart in the bottom right-hand corner of the slide illustrate the point Pete made. Materials, mainly steel account for about two-thirds of the cost of the tower. Certain customers prefer to procure and provide the steel themselves. And pay us for fabrication only.

When this happens, our reported revenue dollars are lower. Therefore, our reported margins appear higher on the lower revenue basis. During Q4 of 2010, we have a large share of fabrication only towers, about 47% of the total towers sold. But none in 2011; and rather unusually the megawatt value was down even more. Because in 2010, we produced a large batch of three megawatt towers.

Towers and Weldments EBITDA declined to $1.6 million, down sharply from 2010. As you can see in the full year numbers, in 2010 towers earned more than 80% of its full year EBITDA during the last quarter. By comparison, in the fourth quarter of 2011, we had the unfavorable impact of 22% lower volume. And also, had a lower margin production mix, reflecting pricing pressure on power margins, lower storage revenue, and lower productivity. The productivity dip was caused in part by starting up production on a new tower design with some unique welding challenges.

Nonetheless, for the full year our tower business grew megawatts by 14% to 593, which equates to a market share of about 9% of 2011 new US wind installation. We reported $10.4 million of EBITDA, maintaining an EBITDA margin of approximately 9%. Relative to our competition, the two largest (inaudible) reported operating losses this quarter. We are very proud of this number. We successfully dealt with seven different tower designs this year.

We are building a reputation for being flexible and adaptable to a wide variety of customer designs and specifications. This, in addition to our diversification into other heavy weldments has positioned us well for 2012 and beyond.

On the next slide, turning to gearing. Our fourth quarter revenue rose to $15.6 million, up 12% from the prior year. As you can see in the bottom right-hand corner graph, the composition of our revenue has shifted dramatically during the past eight quarters. The business has navigated well through this transition, which has involved expanding the sales organization. Adding front end engineering resources; changing machinery layout. And shifting our business model to suit higher production variability.

In the fourth quarter, EBITDA rose only slightly despite the improved customer mix. Because we built less inventory, which lowered absorption. And also, because 2010 benefited from some favorable year-end warranty and inventory reserve adjustments. We expect year-to-year comparisons to be more favorable in 2012.

On the next slide Services Q4 revenue was up 57% from the prior year and finished the full year at $15.3 million, up 35% from 2010. As you can see on the chart on the bottom right-hand side, the level of business activity in the second half was sharply higher than the first half. We operated at a $24 million annualized run rate in the second half. That's about where we expect to be in 2012.

Our EBITDA did not improve, however, due to operational difficulties in maintaining good utilization of our pool of technicians. Higher fixed cost associated with our Abilene and drivetrain service center investment; and some higher safety and training costs. We're very focused on fixing this business. Implementing better systems, introducing higher margins, proprietary service offerings, and managing our costs. Our objective is to minimize our cash outflow in 2012, and become profitable in 2013.

Turning to the next slides. We encourage some initial expenses associated with our restructuring activity. As you may recall, we are in the process of reducing our operating footprint by about one-third. With a targeted annual savings of $5.5 million. To date, we have closed the European office, which will save about $500,000 per year. Have closed the small services office on the West Coast, about $100,000 in savings. And have begun the consolidation of our two Gearing plants located west of Chicago.

This is the most complex element of the restructuring program. We are proceeding slowly so as not to disrupt our production in the face of strong and growing demands from our industrial customers. We will continue to update you on our progress. We now expect the project to continue into early 2013.

The graph on the next slide shows the band within which we expect our operating working capital to range given the structure of our business. Anywhere between 6% and 12% of sales, depending on mix and timing of customer deposits. Our operating working capital declined to 6% of trailing three month sales at the end of the year. A bigger decline than we had forecast.

Our inventories declined by about $8 million to $23 million, due to completing a number of towers, which were in process at September 30th. In total, at year-end our working capital was $14 million, down $2 million from September 30, and about $3 million lower or better than the forecast we talked about last quarter. This was mainly due to higher customer deposits. These deposit balances will decline during the first half of the year. We will increase usage on the Wells Fargo lines to provide added liquidity.

On the next slide, we finished the year with $14.2 million of cash in short-term investments. About $200,000 below the September 30th level. We continue to pay down debt, which totaled $13.7 million at the end of the year. Down to about $800,000 from the prior quarter. As I've mentioned before, the $13.7 million dollar balance includes $2.8 million of grants or forgivable loans, which are classified as debt, but don't really require repayment.

Excluding that amount, our total debt in capitalized risk balance was about $11 million at year-end. And at year-end our $10 million line of Wells Fargo was drawn $532,000. The next slide shows the relationship between debt and EBITDA. We lost some ground on trailing EBITDA in Q4. But continued to reduce our debt balance. During 2012, $4.3 million of debt is scheduled for repayment.

Next slide; nearly three months into the new year, we are forecasting revenue growth of about 20%. And gross margin expansions of between 2 and 3.5 percentage points. I have widened the gross margin range from our last projection because the PTC renewal uncertainty is likely to cause some production in efficiencies in our tower plant with a full year of production generally being accelerated into the first ten months of the year.

However, in our hearing segment, we are seeing higher margins in our backlog as our improved operating performance and expanded customer base are allowing us to improve our pricing modestly. In services, operating at a higher run rate will allow us to manage our tech utilization better. We expect to improve utilization of the Abilene facility. We have made some organizational changes, which will allow us to make further reduction in our overhead expenses. Still are looking at full year EBITDA in the range of $8 million to $10 million. This completes our prepared remarks. I'll turn it over to Pete to handle questions. Thank you.

(Operator Instructions)

Our first question will come from the line of Chris Blansett with JPMorgan. Please proceed.

Hi, Pete. I had a question I wanted to ask about the gearing business and the leverage you expect to see there. You saw a meaningful pick up in industrial gearing in the fourth quarter, which you had indicated before had a higher gross margin profile. But we didn't seem like we really saw that pass through to the margin line. I know there's a lot of moving parts of reconfiguring the operations that are going on. I guess the question is when do we start to see the revenue increase absorb those fixed costs and really start to see the margin leverage take place there?

Chris, I think during 2012 we should start seeing. The margins in gearing should be up in the range of 8% to 12%. One of the things that we're a little cautious about is the fact that we are going to be doing the consolidation. There will be some potentially disruptive impacts of that. That's why I'm giving you a range. I think by 2013, with the impact of the consolidation, the margin should go up then measurably, you know, significantly more. We have said about a $4 million improvement on that business's profitability.

Okay. Then a couple of things. I guess ongoing, I'm assuming that in Q4. Then for the most of 2012, we're going to see a quarterly cost associated with the restructuring, I assume. Is that embedded in the numbers as we see it today? And will just be embedded going forward?

We will separate that out so that you can see the underlying. What we'll separate out are the actual expenses associated with the restructuring. What we won't separate out is -- or what we can't really separate out is sort of the ancillary impact on productivity. I think that's the number that would actually impact the reported margins for the business.

Okay. Just last question for me is what is your CapEx expectation for 2012?

Other than the restructuring capital, which is about -- there's about $5 million left of that; our CapEx is going to be pretty minimal on the order of $2 million or so. Unfortunately that restructuring capital will probably actually flop into 2013. Net, we look like we'll be paying out about $5 million for capital in 2012.

Okay, sounds good. Thank you.

Our next question will come from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Great, thank you. Good morning, guys. Got a couple of questions. First, the 2012 obviously with the pretty big backlog in the wind margin is going to shape up to be a good year for you guys. We're looking at EBITDA being positive for all four quarters. My question is when we talk about this 30% of footprint production, right. How are you guys thinking about the tower business capacity as you sort of prepare for that 0'13 time frame? When we might be looking at potentially down volume in the wind market?

Sanjay, as you know we're selling. We're in the process of selling the plant in Brandon.

Okay.

We have taken the Abilene facility. We've shifted part of that facility to weldments. The idea is depending on what's happening in the market, we can kind of shift capacity back and forth. So if towers is a bit down, we can do more weldments in that facility. As we look at [Manattawak], we have a separate facility who are weldments. But right across the street is a facility for towers and that too, is somewhat flexible. I think the weldments side is what's going to allow it to flex both of those facilities to take advantage of things that are happening in likely the weldment market.

Okay, great. On your gearing side of the business, right. It's been a pretty nice kind of improvement for you guys. It's from the industrial market. The question is, I mean, are we? It's a two part question on that, right. How do we think about sort of your service opportunity with an existing fleet of gearbox on the wind turbines out there? Two, when we think, let's say, '13. I mean, is '13 like 80%, 90% coming from the industrial market? There's a better margin and therefore your comment about potentially getting to that profitably in 0'13?

Yes, I mean, I see the oil, and gas, and mining market, I think to Stephanie's point. It's picking up roughly ten margin points as we make that shift. The wind contracts were quite large, and big customers, and heavily negotiated. I think we will see some margin opportunity as we shift to the industrial market.

With respect to the wind gearboxes, I think it has taken a little bit longer for us to make the change. Partly just to educate customers of our deep experience in wind gearing. And then to get them comfortable with our capabilities. We did go out to [DMV], one of these certification houses to have them review our remanufacturing processes.

Again, to try to get customers more comfortable with the way we remanufacture our boxes. I think the test stand, where you remanufacture a box. You put it on a test stand and you run it. And you get all kinds of measurements out of it also helps create credibility behind our processes. But, it does take a long time for us to kind of qualify with new customers and really get things comfortable. I think that has taken a little bit longer than we had anticipated.

Okay, great. One final question for you. Then guys, so when we look at your service business along those lines, right. Obviously, the opportunity is pretty massive on that front. At what sort of the annual revenue run rate do you expect that service business to be break even to actually contributing to the bottom line?

Well, I think break even EBITDA should be at about the $24 million run rate. Then, as we move north of that we should start seeing our ability to generate operating profits.

Great, that's all I had. Thank you so much, guys.

Thanks, Sanjay.

(Operator Instructions)

Our next question will come from the line of Pavel Molchanov with Raymond James. Please proceed.

Thanks for taking my question. As you move more in depth into the oil and gas arena, can you talk about the competitive landscape as you're competing against some of the established companies there?

Yes, the oil and gas market is -- you've got some dedicated in-house gearing shops. Then you've got third party players like us. I think what we're seeing is there's not enough capacity in oil and gas. With the horizontal drilling that's going on, demand is quite high. I think one of the things we're finding is there is somewhat of a shift to a higher quality gear in oil and gas. That fits really well in our wheel house because the gearing that we were producing in the wind market was very precision gearing, high quality.

We are getting very good traction as we engage with new customers. I think we've talked in the past. Like Gardner Denver is a big customer of ours. We're leveraging that experience with others. We really think we are very well positioned to win over these new customers. As wind started to decline, we freed up some capacity that some of our competitors didn't have. That allowed us to win some of this business. Because we could supply the components faster than our competition.

Pavel, at some level, you talk about other established gear manufacturers in this area. At some level, Brad Foote is 80 -- 84, 85 years old. We have been established and we have been in a lot of the supply chain for some time.

Okay, you mentioned that you're not too optimistic on the PTC getting extended. What are your thoughts on the kind of political dynamics behind the Chinese wind tower complaint that some folks have made? Is it more favorable in terms of probability of success than the PTC issue?

Yes, let me just comment on the PTC. I think we are not confident it will get extended before the end of the year. We think there is enough support that it will eventually get extended once we get the election behind us. With respect to the tower coalition, these trade disputes usually don't get filed unless you have a strong case.

We feel we have a very strong case and similar cases have been filed with other commodities. Like flat rolled steel; there was an issue. They we're able to prevail on that. Our tower is very similar except for the fact that's it's rolled and its painted. We feel fairly confident. We'll see in June what the outcome is.

Right, appreciate the color guys.

Thanks. Any other questions?

At this time, I show we have no questions in queue. I would like to turn the call back over to Broadwind Energy CEO Peter Duprey for closing remarks.

Great, thanks very much. I just wanted to make brief mention on the NASDAQ delisting. At the end of 2011, we did move to the NASDAQ capital market listing. It's had no impact to our liquidity of the stock or the trading of the stock. This change provided us an additional 180 days to secure the minimum bit price deficiency. You can also see in our proxy statement we are asking shareholders to provide to the Board of Directors the authority to execute a reverse stock split if we are not able to get the price of the stock over $1.

Also, in some of my closing comments, I think we've made significant progress in diversifying the business. As Stephanie mentioned, in the tower business we mad seven different tower designs. We benchmark at the top from an operating margin perspective compared to our competitors. In Gearing, we have replaced some of the larger wind contracts, the higher margin industrial contracts, and services. We are very focused on some of the operational issues in growing the business, and fixing, and turning around that business.

We are very focused on improving the operations and the financial performance. I really look forward to reporting our progress on future calls. Thanks for your interest and support.

Thank you for your participation in today's call. This concludes your presentation.