Broadwind Inc (BWEN) 2014 Q3 法說會逐字稿

Hello and welcome to the Q3 2014 Broadwind Energy, Inc. earnings conference call. My name is Daniel and I will be your operator for today's call. (Operator Instructions). I will now turn the call over to Joni Konstantelos. Joni, you may begin.

Joni Konstantelos

Thank you. Good morning, and welcome to Broadwind Energy's third quarter 2014 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.

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.

Having said that, I will turn the call over to our President and CEO, Pete Duprey.

Thanks, Joni. Over the last 15 quarters, we have shown consistent solid improvement in our quarterly results. We built a solid platform for Broadwind's future performance.

Unfortunately (technical difficulty) in Q3, we frankly executed poorly, primarily in our Abilene Tower facility. As we were adding production shifts and staff, as well as qualifying a new tower model, our Abilene plant faltered. We underestimated the amount of change that the production team could handle. We have already taken steps to correct these issues and improve Abilene's efficiency. I will discuss the performance of the towers division in more detail later in the call.

For the consolidated group, the revenues were flat year-over-year and the operating loss showed a $0.5 million improvement over Q3 2013, due to lower SG&A expense and lower regulatory charges. Carrying and services both showed nice improvements. We further reduced our inventory balance and we were able to cut our operating losses significantly in both gearing and services.

Our services segment grew revenue by over 35% compared to Q3 of last year, and they had another record quarter for order intake. In gearing, revenue from oil and gas customers in the current quarter was more than double Q3 of last year. These are some great achievements for the quarter, and I don't want them to be overshadowed by some missteps in towers.

In wind, the fundamentals are strong and the 2015 looks to be very solid, a very solid year. We continue to believe there is support for an extension of the production tax credit after the November election, which should allow the industry enough time to deploy another round of technology improvements to further lower the cost of energy from wind generation. The steel market continues to show increasing demand with a good outlook in commercial construction, auto, and energy markets. Mining is about flat.

Turning to orders, we added $66 million in new orders to our backlog during Q3. This was down from Q3 of last year due to the timing of tower orders, which can be lumpy in any given quarter. However, our tower production capacity is near full for 2015, and in heavy industries our quoting activity is up significantly.

In gearing, nearly 80% of our Q3 orders were from oil and gas customers, another sign that we are moving the business in the right direction. Q3 gearing orders were down compared to last year due to the timing of a large order for replacement gearing received in Q3 2013, but gearing orders are up 22% compared to the prior year. Services had their strongest quarterly order intake since Q4 of 2012 and orders year-to-date are more than double the prior year.

Our total backlog grew to $228 million, a 36% increase compared to Q3 of 2013 and up $6 million from the prior quarter. We feel good about the orders in our pipeline and expect to start 2015 with a solid backlog.

In towers, it is really a tale of two plants. Abilene stumbled quite significantly in the quarter, while Manitowoc has been running smoothly and improving operationally. Let's talk about Abilene first.

We threw a lot at the Abilene facility in a short amount of time. First we were ramping up the full capacity by adding shifts and additional staff. At the same time, we introduced a new tower design to a less seasoned workforce. And some of these employees had only been on the job for a short period of time.

Had we just ramped up production, well, we probably would have been okay. But adding the extra layer of complexity that comes with the new tower design was too much change, and the plant began to struggle to get the throughput. I do want to emphasize this is a short-term production issue.

The order pipeline is in place to be able to reduce more towers next year. We have taken an all-hands-on-deck approach, and made some key personnel changes in the Abilene facility. We have redeployed our experienced plant manager from Manitowoc to Abilene to get better control of the operation and to standardize processes.

We have doubled our resources on training, ensuring the proper work instructions are in place and making sure employees understand their roles and what is expected of them each day. Quality analysts are reviewing production data on defects, performing root cause analysis to provide continuous feedback to supervisors and the shop floor.

We have a significant focus on maintenance in all critical areas to improve machine uptime. While this was a tough lesson to learn, the fixes we are putting in place will be sustainable in the long term, which will make for a stronger and more productive plant next year.

By contrast, the Manitowoc facility is performing very well. The first pass well deal has improved by more than 50% and our productivity has improved 10% from Q1 of this year.

Turning to gearing, I am pleased with the continued operational improvement this business segment has been making. Productivity in the plant increased for the fifth consecutive quarter as our culture of CI resonates throughout the business. Inventory turn stayed at the same level as last quarter, which is a reasonable level for this type of business.

The defect rate declined for the fourth consecutive quarter. Our past due backlog increased by $1 million, which is disappointing, but is mainly due to the mix of more complex gearboxes versus loose gearing. We continue to see strength in our end markets, and with our operational improvements, we feel we are well-positioned to grow the business.

The wind industry is showing some great long-term fundamentals. The graph on the left shows the unsubsidized levelized cost of energy with a dramatic drop of 58% over the last five years. On an unsubsidized basis, the price per megawatt hour for wind falls in line with a combined cycle gas generation. In some areas of the country, wind is below the cost of gas generation.

The turbine technology that is being deployed today, with rotors in excess of 100 meters, allows sites with lesser wind speeds to be financially viable. The proposed changes to Regulation 111(d) are indirectly imposing a cost of carbon, which will result in older coal plants being retired. This will create some additional demand for wind energy in those states that have reasonable wind regimes.

Within the last 12 months, yieldcos are opening up new sources of equity financing for wind assets. With new equity sources, the demand for good projects should increase. We are seeing more utilities owning and rate-basing wind assets.

There is also an increasing trend for major corporations to procure wind energy directly. Companies like Yahoo!, Google, Microsoft, IKEA, Mars, and Walmart are locking in the long-term power purchase agreements, which is something they can't do through financial hedges in the financial markets.

So the point is, the core fundamentals supporting wind energy are improving and there are other drivers beyond purely the renewal of the PTC.

I will now turn the call over to Stephanie to go over the financials in more detail.

Thanks, Pete. Referring to slide 8, on relatively flat Q3 revenue, our gross profit margin declined from 9.4% to 6.7% of sales. The drop was due to sharply higher labor costs, including overtime and increased outlays from maintenance and critical spares in towers to help manage the scale-up of the Abilene plant. Gross profit margins improved in our other two operating businesses.

Operating expense was favorable. It declined to $5.7 million, down $1.2 million from last year.

In 2013, we reached a settlement with the EPA regarding a legacy environmental issue at our Brad Foote plant and recorded a $1.5 million charge in the third quarter.

In the current year quarter we added $800,000 to the $750,000 reserve we established last quarter related to the potential settlement of the SEC investigation regarding issues in 2009 and 2010. Although we have reached preliminary agreement with the SEC staff, we cannot consider this closed until it is finalized, which we do expect to happen before year end. So, the lower regulatory charge helped us by [adding that] $700,000 in the quarter. Added to this were the impacts of lower incentive and share-based compensation, reflecting the weaker financial results in the quarter.

Our operating loss for the quarter totaled $1.8 million, an improvement of about $500,000 from the 2013 period. EPS was a loss of $0.12, bringing us to an accumulative loss of $0.07 per share for the nine months to date, sharply better than the $0.47 loss last year. This was worse than the small profit I had projected during our last call because neither the additional SEC settlement provision nor the significantly more difficult tower results were foreseen adequately.

Turning to slide 9, as Pete described, tower sales were down 17 units in the quarter versus the prior year and below the low end of our guidance range. Versus last year, in addition to the impact of the lower revenue, our labor hours, overtime, and worker's comp expense were all higher, accounting for more than $2 million of the reduction in operating income. Added to this was a $700,000 increase in costs associated with higher maintenance, spare parts and travel.

We are making progress, but as of today, we are still wrestling with higher labor hours at the Abilene plant. And we are producing a lower margin mix of towers this quarter. We have been more cautious with our Q4 outlook and are projecting tower's revenue flat at about $45 million, and a similar level of operating income profitability in the $3 million range.

As you can see in the bottom left-hand chart, we have been moving our sales up gradually to the 500 tower per year or 125 tower per quarter combined capacity of our two plants.

Next slide please. Pete talked about the encouraging operating trends in gearing. The Q3 results were slightly behind my guidance because they didn't get all of the planned production out of the door. Nonetheless, the comparison continues to be very favorable versus last year.

On $10.3 million of sales, the operating loss was $2.3 million, less than half the 2013 level. And the EBITDA continues to be close to breakeven. The operating improvement reflects the higher-margin mix of sales, predominantly for oil and gas customers, which you can see in the bottom left-hand corner. Also favorable were the absence of last year's $1.5 million EPA charge and $900,000 of lower restructuring expenses.

The business is continuing to operate with leaner inventory. They achieved more than six inventory turns at quarter end versus four a year ago. The four is more typical for gearing companies, so the increase to six represents a meaningful accomplishment.

Unfortunately, due to the impact of the standard costing we have experienced about a $1.8 million adverse impact on the P&L this year due to the reduction in capitalized overhead in our work-in-process inventories. And about $400,000 of that fell into this quarter. I think this is now behind us and will not see accounting distortions of this type as we go into 2015.

Looking ahead, Q4 gearing revenue should be in the $10 million to $11 million range with an operating loss similar to this quarter, around $2 million to $2.5 million, versus a 2013 Q4 operating loss of $5.6 million. And EBITDA should continue to be near breakeven. The fourth-quarter results should include the final restructuring expense for this business. So we will begin 2015 with a clean slate.

Services Q3 results were in line with our guidance, with revenue of $5 million and an operating loss of $700,000, and an EBITDA loss of $400,000. Looking in the graph on the bottom of the page, our service technician headcount climbed again this quarter due to solid construction support demand and also significant demand for blade work. We expect our Q4 operating results to be down only modestly with revenue in the $4 million to $5 million range and similar operating and EBITDA results.

Since Q4 is typically weaker due to weather, this will mark a significant improvement from last year, when revenues dipped below $2 million in the comparable quarter.

As I predicted on the last call, our operating working capital improved significantly this quarter, dropping sharply to $11.5 million. Inventories continued to decline from the very high level at year end 2013, when we had purchased steel in advance to lock in a favorable price for one of our tower customers. Our consolidated inventory today is consistent with about 7.5 inventory turns for Broadwind as a whole and reflects improvements this year in each of our businesses. And customer deposits rose to over $20 million, including deposits for tower steel and for the more complex gearboxes.

Receivables remained below $25 million with very little past-due. With operating working capital equal to about 5% of annualized sales, our working capital management compares very favorably with other industrial manufacturers.

Turning to the next slide, liquidity remained very strong at quarter end. Debt plus capital leases totaled $4.2 million at a composite average interest rate under 2% because of the low and zero interest rate grant. Net debt was a negative $23.7 million at September 30. And our $20 million credit line was undrawn as well. We had about $14 million available based on our qualified receivables and inventories which we could have borrowed.

Last quarter we indicated that we were considering an increase in capital spending to expand our tower production capacity. We have decided against an expansion at this time and shifted our focus to improving production consistency using our existing assets.

Given our strong liquidity, our confidence in a positive outlook for 2015, and the fact that we are earning no return on our cash assets, our Board has authorized us to buy back up to $10 million of Broadwind stock over the next six months. We do not believe that will conflict with our interest in identifying and financing targeted bolt-on acquisitions that are aligned with our growth strategy.

Turning to the financial outlook, we have moderated our Q4 forecast with revenue now projected in the $58 million to $61 million range, an operating loss of $3 million to $4 million and small positive EBITDA. Versus Q3, this lower profitability reflects a less favorable tower mix and the seasonal effects within services. Assuming no material impact of the stock buyback, this should translate into a per-share loss of $0.20 to $0.27 for the quarter and $0.27 to $0.34 for the full year.

Although the stumble in towers and the SEC settlement charge mean we will not achieve full-year profitability this year as planned, we are proud of the very favorable year-to-year trend our employees have delivered since 2010 and believe that trajectory will continue into 2015.

And with that, I will turn the call back to Pete.

Thanks, Stephanie. We talked about the quarter, and frankly, it should have been better. We will fix the tower issue and we do have in place the backlog for a strong 2015.

As I mentioned, the wind market fundamentals are the strongest that they have been in 10 years. We simply need more certainty over what is happening in Washington. The oil and gas markets are very robust and we are watching the price of oil and gas very closely.

Our liquidity position is strong and we believe the Company's prospects for the future are outstanding, which is why we are putting in place a stock buyback program. The gearing and services businesses are getting into their groove from an operations perspective. And as Stephanie mentioned, we reached a tentative settlement with the SEC, which is the last remaining legacy issue from the prior leadership. For each of the businesses to be running on all cylinders at the same time is when things at Broadwind will really get exciting.

I will now open the call to questions.

(Operator Instructions). James Ward, Macquarie Capital.

Morning. On the share buyback, given your focus on growth -- and I know you have stated that you are not going to receive much in the way of return on the cash that's just sitting there on the balance sheet, but what is the motivation in returning it? Why not just hold on to it and take advantage of growth opportunities that might come up? It just seems to conflict with being focused on high-growth if you are going to be returning cash to shareholders at such an early stage in where the story is at.

I think at the level we are talking about, at the $10 million level, really what we are doing is offsetting the -- what I would say is the normal dilution that comes from share awards, and we were matching 401(k)'s with stock at one point as well. So it is relatively modest and it is just to keep that share count fairly constant.

Okay. That's fine. In terms of PTC, where does your conference stand on being extended? And what are you basing that on?

Well, I think there's always been bipartisan support for the PTC. I think what -- the scenario that we think will play out is as part of an extenders, tax extenders package. There's roughly 40-some-odd tax credits or incentives that are expiring that Congress really will need to deal with, and we believe it will happen in the lame-duck session.

And I think probably the best scenario for an extension is just keeping the language as it was. The last time it was passed in 2013, and from what we are hearing out of the American Wind Energy Association and other lobbyists in Washington, they think that there's a very good chance that it will get past in an extenders' package. And I think from the industry point of view we would like to get one more opportunity to continue to pull cost out of -- out of the cost of wind energy, and then we can probably compete head-to-head with fossil fuels. So, one more technology cycle is what we would like to get at this point.

And so you are fairly confident that it will be included in the tax extender (multiple speakers)?

Yes, I think it is hard to handicap these things. I was at (multiple speakers) event last week and there was a lobbyist there who is pretty close to it, who indicated that she thought that there was a high probability. So that is what we're hearing and I think there are lots of good reasons why it should get passed.

Okay, great. My last question here is on Abilene, and wondering whether, from your perspective, it was more of an issue with leadership. You have indicated that management at the plant level there has been changed. Or is it more on the staffing side? You have indicated that staff was a bit greener, and not as accustomed to the processes and therefore couldn't adapt as easily. How long do you see it taking before the kinks get worked out and it's producing at a level that you are satisfied with?

Yes, I think the issue was across the board. Certainly it was leadership, myself included. At the -- certainly we threw too much at it at a fairly green set of employees, so we probably overstretched it too much. So we have really focused on retraining the employee base and getting them to be able to deal with two different tower variants in that plant.

I think we have thrown the right resources at it. And we have indicated that there will be some ongoing impact in the fourth quarter, but I would expect by early 2015 that plant will be back producing at the levels that it should be. And I think that is doable. It will be some hard work, but I think it is very doable.

Okay, great. Thank you very much.

Any other questions?

(Operator Instructions). And we have no further live questions.

Okay. All right. It was a tough quarter. We will get this behind us. We'll fix it. And, like we said in our prepared remarks, we feel very strongly that the Company is well-positioned for the future and we will be showing better results in subsequent quarters. Thanks very much for joining the call. Bye.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.