Broadwind Inc (BWEN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter first quarter 2012 Broadwind Energy Earnings Conference Call. At this time, all participants are in listen only mode. Later we will conduct a question and answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. John Segvich, Director of Investor Communications. Please proceed, sir.

Thank you. Good morning, and welcome to Broadwind Energy's First Quarter 2012 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 dot 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 webcast] 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. Having said that, I will turn the call over to our president and CEO, Pete Duprey.

Thanks, John. Good morning everyone. I'm going to start on slide three. This morning we reported a 25% increase in revenue. Year-end was up 18%. It was primarily driven by oil, and gas mining, and off highway vehicles. Services was up 88% driven primarily by our field service team and additional blade work. Towers was up 25%, but this was driven by a greater percentage of the towers with steel content versus fab only. This is something we talked about at the last conference call. And Stephanie will go into more detail later on in her presentation.

Adjusted EBITDA was sharply up from $200,000 in Q1 2011, to $1.4 million in Q1 2012. Gearing was really the shining star of the group. Orders were up 12%. Revenue was up 18%. EBITDA, as a percentage of revenue was 11% compared to 1% a year ago. 75% of our revenue was from the industrial side of the Gearing business. So, as we have talked about previously, Gearing has really made the transition from being almost 100% wind energy gear company to now a better balance between wind and industrial. I think they've made that transition well. I think this quarter proves it.

Turning over to towers and weldments. Tower orders, we anticipated early low tower order intake for the quarter. Really primarily as a result of the $50 million order we took in Q4. On the other side, orders in our specialty Weldments business was $2.1 million compared to $1.1 million in Q1 2011. Revenue was $1.8 million in Q1 2012. You can see that the Weldments business, and we've talked about this, is growing nicely. I'll also remind people that the margins on weldments is almost twice what they are in towers. So, it doesn't take too much additional incremental revenue in this business to start to fall to the bottom line.

Services; first quarter for Services is usually the most difficult quarter. Partly because of the seasonal nature of the business. We had strong order intake. We continue to work on our tech utilization. We had a $20,000 improvement in our EBITDA loss from a year ago. So, overall for the quarter, I think I'm very pleased with the start to the year. We continue to make good progress in diversifying the business to a better balance between wind and industrial.

We'll turn to slide four. I'll start with the left-hand side of the slide. On the Tower's side, we have talked about the order intake. On Gearing, we had 12% increase in our order intake. Usually the first quarter orders are lower in Gearing. I will say that all of the orders we took in Gearing were industrial. So, again that starts to show that the change in the mix. On Services, we doubled orders. Again, primarily we're seeing a lot of interest in some of the blade services that we are offering. And customers seem receptive to some of the blade maintenance programs that we're offering.

Turning to the right-hand side of the slide. We've added some additional analysis to our backlog. The blue line represents our traditional backlog line that we've shown. The red line sort of [recasts] our backlogs to remove a one three-year frame agreement that we received in 2010. The reason we're making this adjustment is that the Tower market is moving away from multi-year agreements to really orders by project.

So, we removed from the back log associated with the is three-year frame agreement. Only added back to backlog deliveries that were within six months of the reporting date. For a tower that's going to be delivered in Q3 of 2012, it would show up in our backlog in Q1 of 2012. A delivery that would occur in 2013 would not be reflected in the backlog. We think the red line is more reflective of our normal backlog going forward. Hopefully you'll find this additional cut of our backlog enlightening. We'll start reporting it both ways going forward.

Turning to page five. I want to talk a little bit about the Tower business because I think there have been some fairy significant changes. The business was built organically starting in 2003. We were sort of the new kid on the block. We tended to win business with what I would say is less established OEMs that were maybe new to the US market. We started to build out the larger, more complex towers. We tended to have smaller tower runs with more changeovers.

If you look at the graph from 2003 to 2010, we were really only addressing 38% of the market. In 2011, we were fortunate enough to win a tower order with [Global] and Siemens, and a third large OEM. We are now qualified to 82% of the market based on the 2011 installations. The point is that we are in a much better position to get our reasonable share of the market going forward than we were a year-ago. I think that's the key point.

We turn to page six. I would like to touch on our restructuring that we talked about a couple of quarters ago. We continue to shed idle assets, reduce square feet, and streamline the remaining facilities which is key to our turnaround. On Gearing, as we reported, we were -- we're consolidating two facilities into one.

We have renegotiated the lease in the facility that we're moving into. We've been building wall in the wreck and crane to get ready for the move. We have moved about 20% of the equipment. On the corporate infrastructure side, we closed our European office. We're in the process of moving the corporate headquarters to the Gearing plant. We had room in the Gearing plant. We are paying rent on that space. It just makes sense to move the corporate office there. We still continue to market the idle tower facility. We have no formal offers but there is interest.

We continue to review all of this space around the US. We have closed the California office. We are in the process of renegotiating a number of leases. We think ultimately there's probably $500,000 worth of savings there. So, through this process I think we're pretty confident that there's greater than $5.5 million of savings here, which still would support a business of $400 million. Turning to page seven. With respect to our deliverables, I think Q1 shows that we're off to a good start. We are seeing some of the benefits in the work done on the plant consolidation as we move machines into cells. I would say most of the benefits are going to come in 2013.

As the gearing sales team continues to cultivate and work with customers, we are seeing a lot of demand for the services that we offer. Our response times or our cycle times seem to be better than some of our competition. I would also say that we're winning some industrial gearboxes, which tend to have a higher margin because of the value add is higher. Again, I think the transition in the gearing business is going quite well.

On the towers and weldments side, we have just started production of some of the new customers. It's really too early to tell. With respect to weldments, as I said before, orders were strong. We see very good prospects in that business. As I said, we tripled the revenue compared to last year. Services; I think it's; the key there is really working with customers and showing them what our capabilities are. We have done a lot of end of warranty work, which tends to get us a foot in the door. Where we can build a solid relationship with the customers. I think we're still very confident as they, the install fleet about 20,000 megawatts that went in between 2005 and 2009. As that continues to age. We're going to find strong demand for our repair services.

Our objective remains to achieve a sustained profitability and cash flow generation into 2013 and beyond. In the first quarter I think was a very good step towards that objective. I will now turn the meeting over to Stephanie who will walk through the financials in greater detail.

Thanks, Steve, and good morning. Let's turn slides eight. As Pete said, our first quarter results demonstrated good progress on the path to profitability. Turning to the consolidated income statement, we posted a gross profit of $2.2 million for the quarter, or a 4.8% gross margin excluding restructuring expenses. This is up from last year's full year rate. Reflecting the progress of gearing.

The gross margin was below the 2011 first quarter figure only because of the impact of the high steel content on towers last -- versus last year. Had last year's towers been built including steel, the estimated of the gross profit margin would have been comparable. Sequentially versus the fourth quarter of 2011, gross margin was up nearly 3 percentage points.

We continue to make progress with reducing operating expenses as well. At $6.2 million, first quarter expenses were down $400,000 from last year. Due to lower salary and benefit expense; and reduced professional expenses. These reductions more than offset $75,000 of restructuring expenses, mainly incurred to close a West Coast service office. As a percent of sales, excluding restructuring, operating expenses totaled 11.2%, down both sequentially and year-to-year.

We are on track for the $25 million to $26 million full year run rate we projected, which reflects benefits from a portion of the restructuring actions already completed. Notably the closing of the European office and some other overhead reductions. Our operating loss was $3.9 million including $500,000 of restructuring expense.

The operational improvement is more evident in the adjusted EBITDA of $1.4 million, which does not include non-cash charges or restructuring. The loss per share narrowed to $0.03. We continue to record no income tax credit on the operating loss. As of the end of last year, we had more than $136 million of tax loss carry forward. When the Company turns profitable we will operate for some time without making Federal Income Tax payment.

On the next slide, Towers and Weldments recorded revenue of $35.2 million and up from 2011. But the true activity in terms of power sections produced was actually down 19% from last year. Just to remind you, referring to the illustration in the bottom right-hand corner of the slide. Materials, mainly steel account for about two-thirds of the cost of a tower. Some customers prefer to procure and provide the steel themselves. When this happens, our reported revenue dollars are lower and therefore our reported margins appear higher on the lower revenue rating. During Q1 of 2011, we had a large share of fabrication only towers. About 43% of the total towers sold, but none in 2012.

We are gaining traction with our diversification into Weldments. In the first quarter of 2012, versus 2011, weldment revenue tripled to $1.8 million or 5% of the Tower segment revenue. However, incremental margins on weldments were about doubled (inaudible) for wind towers. Therefore, our (technical difficulty) for towers is closer to 10%.

We expected to ship about $10 million of heavy weldments this year and have set of goal of doubling that level in 2013. Gradually, we will achieve more diversification in our customer and industry base for these plants. In our Abilene plant today, drill [crawl room at] for mining and wind towers are now being produced in adjacent production line. At tribute to our increasingly flexible manufacturing capabilities.

Operating income and EBITDA were below the prior year due to the 19% volume reduction in towers and the lower margin mix of towers due to increased pricing pressures, partly offsetting were the benefits of the increased sales, and weldments, and improved productivity. On the next slide, Gearing, our first quarter revenue rose to $16 million, up 18% from the prior year. As you'll see in the bottom right-hand corner graph, the composition of our revenue continued the research trend line, shifting out of Gearing, going into the wind turbine, and into a broader range of industries.

As the green line shows, since the first quarter of 2010, two years ago, sales to industrial customers have nearly quadrupled from about $3 million a quarter to more than $12 million in the current quarter. Our sales force continues to identify additional opportunities for growth. In this quarter, Gearing earned $1.8 million of EBITDA. The adjusted EBITDA margin rose to more than a 11%, a significant improvement from last year's run rate. The higher margins of the current customer mix are showing through and the difficulties associated with the customer transition are beginning to be behind us.

During the next several quarters, we expect it to continue to perform with low double digit margins while we manage the distractions of the plant consolidation. And see only limited benefits from restructuring. As we move into 2013, however, we should increasingly benefit from the consolidation. Our medium-term goal is to expand our EBITDA margins to industry average levels in the 20% range.

Our Services business made progress in the first quarter on the next slide, which is seasonally the lowest. We booked revenue of $3.4 million, nearly double the prior year. The operating loss rose to $1.6 million due to nearly $300,000 of higher depreciation expense. This increase, it was due to the startup of the drivetrain repair center late in the first quarter last year.

The EBITDA loss improved modestly however due to the higher activity level. We remain very focused on improving this business by growing sales, implementing better systems, introducing higher margin proprietary service offerings, and managing our costs. Our target is to approach break even EBITDA in the second quarter and then begin generating positive cash flow in the second half of the year.

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 rose to 7.4% of trailing three month annualized sales in the first quarter. We built $9 million of inventory mainly for raw material to support a higher tower build level in the second quarter. In addition to higher inventories, customer deposits declined as expected. These affects were largely offset by higher payables. Net total operating and working capital rose $2 million in the quarter to [$15 million].

On slide 11, liquidity; we finished the quarter with $11.3 million of cash in short-term investments. About $3 million down from the prior year-end. We used cash to fund the increased working capital and to pay down debt. Debt and capital lease balances declined to $13.1 million and include $2.7 million of grants or forgivable loans, which are classified as debt. But don't really require repayment. Without that amount, our total debt would capitalize the lease balance was $10.4 million.

At the end of the quarter as planned, we increased our usage of the Wells Fargo line to $2.9 million with $7.1 million available. With heavy tower builds through the second quarter we will likely increase working capital and usage on the Wells line.

The next slide shows the relationship between debt and EBITDA. As I just mentioned, the debt balance declined further in the quarter. And the TTM EBITDA turned up due to the relatively stronger Q1 results. With approximately another $3.3 million scheduled for repayment this year, we are in discussions to increase our lease financing by $5 million to $10 million on our sizable, unencumbered fixed asset base to improve financial flexibility. Even with this additional financing, after scheduled debt repayment once we complete the sale of the [Brandon] facility and pay off, the associated mortgage our year-end debt balance would not likely exceed $15 million.

On the final slide, we have not changed our outlook for the year. We are forecasting revenue growth of nearly 20% and gross margin expansion of between 2% and 3.5 percentage points. In towers our challenge is to efficiently manage the production changeovers associated with the large new customers we added last year. In Gearing, 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 where our activity level is building, we are managing our tech utilization better.

Second quarter revenues and EBITDA should improve sequentially and be significantly above the prior year. We are still looking at full year adjusted EBITDA in the range of $8 million to $10 million. This completes our prepared remarks. Now, I will turn it over to Pete to handle questions.

Thanks, Stephanie. First question?

(Operator Instructions)

Your first question comes from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Great, thank you. Good morning, guys. First question on your Gearing side of the business. Where the Industrial segment is really giving you guys a pretty nice growth here. In the past, you guys have been more sort of focused on the oil and gas segment of the market. Is that still the case?

Because it's sort of counter cyclical for your wind business given the low prices, the commodity on the natural gas side. Can you elaborate on that a little bit? What are the areas of strength for you guys in that business? What sort of a sustainable growth rate can we think about even as we start look into 2013 there?

Sanjay that the Gearing market is about a $5.5 billion market. Oil and gas is actually less than 10% of the overall market.

Okay.

Even our -- we're into highway vehicles, mining; and certainly oil and gas. But even as you look at oil and gas, you've got to look at is it just dry gas? Is it liquids? Is it offshore because offshore continues to grow at a fairly rapid rate? It comes back to something I've talked about before, customer intimacy. Understanding who our customer is and where this stuff is going.

Certainly we have some exposure to the [bracking] side. But, I think we actually have a pretty well balanced portfolio. Mining and off highway vehicle is growing in similar patterns as oil and gas. I don't think we have this huge concentration in oil and gas. It has grown nicely as wind came down. I'll admit to that, but it is not the only thing outside of wind in our business.

Got it. Given the interesting capacity that you guys have in that -- within that segment, right. Where you could do obviously well north of a $100 billion in revenue. What is your view as to? How are you guys sort of thinking about increasing mix from the broader industrial market for that business? How should we think about that especially because I am kind of a bit more interested in really as you think '13 and beyond?

I think some of the growth will continue in mining as we continue to diversify. There are a number of large mining customers that we have not penetrated yet. That we are in discussions with now. I mentioned briefly in my prepared remarks about industrial gearboxes. We are seeing that come back. We have a long history in making industrial gearboxes for steel or draw works, and bridges, and also used in oil rigs, offshore oil rigs.

I think that will be a good growth opportunity for us. Off highway vehicles, both the locomotive side and the large crawler cranes and things like that; we -- as long as the economy stays growing. And I would say that those parts or those components tend to go to India, China on a worldwide basis. It is not like even though; most of our revenue is generated in the US. I think a lot of the parts that we make are going overseas. That is also true in the Weldments business.

The forecast for -- at least some of the markets that we are in like industrial machinery, oil and gas, mining; the forecast there is for about a 10% growth rate. I actually think we can do a little bit better. Just because --

(inaudible)

We can win some of that back.

Okay. Go ahead. One final question for me then guys. As we really think about your service business. Right, while the new install on the wind market could actually decline into '13 given all of the policy dynamics and everything surrounding it. How do you sort of think about? I mean, basically upgrade opportunity maintenance; opportunity because that could actually turn out to be a pretty nice offset to you guys. Even when you think about potential decline in the Tower business or that market.

Yes, I think we are very bullish on the Services market.

Okay.

Year-over-year, we are looking at good growth rates. We're doing a lot of end of warranty work. We're doing a lot of blade work. As the fleet ages, we're in a very good position. I would say on Services we're in the non-routine (inaudible). Gearbox failures, blade cracking, and delamination; there aren't a lot of players who are going after that niche. There are a lot of players that are going after [OEM], but I think we are finding a nice niche in this non-routine maintenance position. That particularly as the fleet continues to age, we have got the people who are trained on multiple equipment. We have the safety record. I think that's why we're winning a lot of this work.

Let me just add one comment. Our run rate right now in terms of our construction support business. It is only about 15% of our services. The majority of our revenue is coming from the installed base. I think probably in the fourth quarter this year, we'll do more construction support just because of the race to get things in before year-end. But it's really the other 85% of our business where we think the growth should continue and even accelerate.

Okay, that is great. Thanks a lot guys.

Your next question comes from the line of Christopher Blansett with JPMorgan. Please proceed.

Hi, good morning, this is Eugene Lee standing in for Chris. My question is around the Tower and Weldments business sides. Based on what the results for this quarter. How should we be looking forward for the (technical difficulty) '12 in terms of the portion from the weldments? Do we consider it's (technical difficulty) a larger portion? How should we model that? Thank you.

Do you want to take it, first?

Yes.

All right, Stephanie.

I said our Weldments business was about 5% of our revenue this quarter. Because it's got a higher incremental margin, it was more like 10% of our profitability. That was at $1.8 million at sale. Our forecast for the year is to be at $10 million this year. You can see we expect it to increase as the year progresses. Then next year our target is to be at $20 million of Weldments business. Effectively we have taken about 20% of our tower capacity today and shifted it to the Weldments business. Does that help?

Yes, thank you.

(Operator Instructions)

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

Hey guys, just curious what you're hearing from [OIA] or your other industry sources about the PTC and perhaps timing for bringing it up for a vote?

I think the consensus right now, particularly with the election is that we think nothing will happen until a lame duck session. That seems to be true with a number of other political issues right now. I think it's unfortunate, but I think that is where we're going to be. I still believe that there's a lot of support for wind energy in this country. Both at the local level and at the state level. A lot of -- I think it's 30 governors that supported extending the PTC. It is unfortunate, but I think that is where we are. The lame duck session is when we'll get a [bill for that].

If that in fact materializes and there is a positive result. But, in December, let's say; how long would that kind of lull be in 2013? I mean, how many quarters would the industry still be in kind of recovery mode?

I would say it takes a good six to nine months to ramp back up. But with that being said, we're talking to a number of the OEMs today about what their outlook is. How one might be able to level load. Working cooperation and try to level load production so that you don't end up with a significant shut down of some of the key components. We're kind of at the early stages of some of those discussions. I think there will be more discussions in June at the OIA wind energy show. I think there is a spirit of cooperation between the supply chain and the OEM to try to navigate through this.

OK, I appreciate it guys.

OK.

I would now like to turn the conference back over to Mr. Peter Duprey for closing remarks.

Great, thanks very much. One thing I would like to say is I think we made a lot of progress in Gearing. I said before they've kind of turned the corner. Towers is positioned much better from a market penetration and a diversification with our Weldments business. Services is growing nicely and is on a good path to where it's break even for the year. As we continue to execute on the restructuring plan, I really believe that our prospects are bright in the future (inaudible) this year, and next year, and beyond. Thanks for the interest in Broadwind and thanks for participating.

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.