Broadwind Inc (BWEN) 2014 Q4 法說會逐字稿

Welcome to the 2014 Year-end Earnings Conference Call. My name is Yolanda, and I'll be your operator for today's call.

(Operator Instructions).

It's now my pleasure to turn the call over to Joni Konstantelos. You may begin.

Thank you. Good morning, and welcome to Broadwind Energy's Fourth Quarter and Full Year 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 Web site 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-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, Joni, and thanks, everyone, for joining the call. 2014 showed steady improvement in top line growth and a narrowing of our operating loss despite production issues in our Abilene tower facility in the back half of the year.

As we disclosed in early January, the fourth quarter was hampered by the continuing effects in the new tower that we never built before in this plant and the qualification process was more difficult than we expected. This resulted in additional labor and logistics costs that impacted the quarter by approximately $3 million.

It was an expensive lesson. Consequently, revenue and margins were down compared to Q4 2013. On a positive note, we have a $200 million backlog going into 2015 and expect this to grow as we book tower orders for 2016.

At year end, our liquidity position was strong, with $20 million of cash and securities and nothing borrowed on our line of credit. For the full year of 2014, revenue was up 12% compared to 2013, and we were able to reduce our operating loss considerably.

We completed a $14 million investment associated with our 3-year restructuring plan, which effectively reduced our operating footprint and streamlined our gear manufacturing. We've made further progress in reducing our SG&A expense to 9% of sales compared to 10% last year.

Turning to our Tower business, I am pleased to report that customers certified the Abilene site for production. Qualification process is behind us and the throughput through the facility is improving. You can see from the chart that Q4 was the low point and each month -- and now each week, the facility is improving.

We are not at our targeted 10 sections a week, but we are moving in the right direction. The good news is production tends to flow more smoothly with two tower types running through the facility. With two large customers qualified for this plant, it becomes more valuable.

A new headwind that we're navigating through has been the West Coast port delays. Our supply chain has become more global, and as a result, we've been impacted by the work slowdown. We have experienced an additional six to eight weeks to receive critical components from certain Asian suppliers. Since we are running at a high capacity utilization in 2015, we accelerated production for a customer where the components were more readily available.

Thus, we built ahead of schedule in Q1 so that we wouldn't lose these valuable production slots. These towers were not yet due. We could not bill the customer nor could we recognize revenue in Q1. Q1 will be impacted by approximately $5 million, which will be realized in Q2 and Q3.

The key is we were able to manage through the issue and ensure that the production slots were not lost. Although this strike has been resolved, it's likely to take two to three months for components to flow normally.

Turning to orders, we booked $135 million in new orders in 2014, which lagged behind the record high levels in the prior year, due mainly to the passage of the PTC in 2013 and the booking of multiple years of production. In 2014, we booked $78 million in new orders in the Towers and Weldments segment, and we are currently in discussions with our customers for 2016 orders.

Gearing orders were well ahead of the prior year, due mainly to strong oil and gas orders through the end of the year.

Services orders were up 85% from 2013, due to strong demand for blade repair work.

As I've mentioned before, we ended the year with a strong backlog of $200 million. At year end, 77% of our 2015 forecasted revenue was already in our backlog. As a result of the 2014 extension of the PTC, our customers booked a lot of equipment orders in the final weeks of 2014.

We are now in detailed discussions to lock in tower orders for 2016 and would expect Q1 and Q2 to be very active.

Turning to the wind market, the wind market continues to look strong despite the fact that the industry didn't get a long-term tax extension. At a recent wind energy finance conference, the outlook was actually quite upbeat. There's good visibility through 2016. The U.S. Treasury has issued some clarifying language around started construction projects, whereby the tax credits could qualify into 2017.

Yield co's have been very active in purchasing projects in development and the financing of merchant-hedged projects seems to be coming back. There are now 19 players in the tax equity market. Uptake agreements continue with some of the larger energy users looking to lock in a long-term cost of energy through renewables.

At year end, approximately 13 gigawatts was under construction with a majority in Texas, the Midwest and the Plains States, making Broadwind well positioned to take advantage of the growth in these areas of the country.

The industry is lobbying Congress to pass a multiyear credit to provide certainty and eliminate the stop-start nature of this industry. There are likely to be 3 to 4 opportunities in 2015 to attach a renewal provision to similar legislation that has a high priority with Congress.

Costs continue to fall as tower heights increase and rotors become larger.

On the transmission side, there's more investment being made and some major projects are in the works to move wind power from a high resource area to load centers. We have seen the benefits of transmission lines in areas like Texas, where the CREZ lines have increased reliability and reduced costly congestion. Further investment in transmission lines throughout the country will translate into increased power from winds and other renewables.

The demand for wind energy is strong and gaining momentum. The improved energy capture of today's turbines, the EPA rule 111(d) shifting to power generation with lower emissions, financing vehicles like Yield co's and major corporations for carrying renewable energy directly, we feel bullish about the future of wind energy in the United States.

In our Gearing business, we are facing some challenges with the dramatic drop in oil, and to a lesser extent, natural gas prices. We entered 2015 with a $20 million backlog. Demand for mud and frac pump gearing has dropped significantly, and at least one customer has pushed Q1 and Q2 deliveries into Q3 and Q4, representing about $4 million of orders in our December 31 backlog.

We currently expect the oil and gas market to be approximately 50% lower than last year, which could be an $8 million to $10 million reduction revenue. Some of this shortfall, we would expect to make up with greater strength in the industrial and skill markets, which seem to be fairly robust.

Additionally, there's about $2 million in past due orders going into 2015, which should help cover some of the oil and gas revenue declines. The oil and gas market is quite dynamic right now and it's hard to say how this will shake out for the year. As a result, we are managing our costs tightly.

We look to -- we look forward to applying a lesson learned in 2014 to make 2015 more successful. We've improved performance in Towers, managing through the headwinds of Gearing and Services having double-digit growth. We would expect the overall revenue growth rate in the 6% to 8% range.

Selling our tower capacity for 2016 is another key initiative for the first part of the year.

Achieving profitability is a key milestone for the year. Although we are facing some headwinds, we should be able to manage through these challenges and achieve this milestone.

For the future, we must learn from our mistakes of the past. Our new product introduction process was not robust enough, which cost us significantly in 2014. We are developing these skills and we'll deploy these processes company-wide.

And with that, I'll turn the call over to Stephanie who will go over the financials in more detail.

Thanks, Pete, and good morning. Referring to the table on the left, on $53.8 million of revenue, we incurred a $92,000 loss at the gross profit level, due to the heavy out-of-pocket costs from the low tower production in Abilene.

Because we didn't have a finished article approval from our customer at year end, we were unable to complete and bill any Abilene-produced tower customers -- any Abilene-produced towers for this customer.

And logistical scrap and labor costs were up significantly as we worked to meet the qualification requirement, effectively removing $4 million from gross profit.

Our operating expenses, predominately SG&A, were down $1 million from the prior year.

On a positive note, we have successfully managed these down below 10% of sales for the first time, both to the quarter and the full year. Our operating loss of $5.2 million, while disappointing, was in line with the updated guidance we provided when we preannounced in January.

Looking at the right-hand chart, we've update our progress on improving our consolidated margins, a key focus area. Both gross and operating margin advanced in 2014 as we benefited from completing our restructuring project and made some other operational improvements in Gearing. Adjusted EBITDA, which excludes restructuring, declined to 3.6% of sales due to the Abilene plant difficulties.

We sold 101 towers in Q4, down from 110 towers in 2013, and we recognized revenue of only $38.6 million, a level not seen for Towers since early 2013. The modest operating income was impacted by the lower volume, higher logistical and warranty costs, plus higher scrap maintenance and labor.

Turning to the far right column, notwithstanding the very weak Q4, we ended the year selling 435 towers at a 9.8% operating margin. As Pete said, our focus today is to restore Abilene to its full capacity production of 150 towers a year and to bolster our new model introduction process to avoid a repeat of this type of interruption.

To free up more space in our Abilene tower plant, we are planning to consolidate our Abilene Weldments production, which is currently co-located into another facility. And we're also adjusting some of our supply chain practices to reduce delivery risks such as what we have experienced recently.

Q4 Gearing orders totaled $6.3 million, up 24% from a weak 2013. For the year, our orders totaled $41.9 million, up 21% year-on-year and in line with our sales level. Q4 revenue of $10.7 million was in line with our guidance and our operating loss was less than half of 2013. We remain focused on growing sales and reducing our costs to bring this business to profitability.

For the full year, sales totaled $42.3 million and our operating loss was $9.4 million, including $1.5 million of restructuring costs. With our restructuring projects complete, we exited the year with $2.4 million of annualized restructuring-related savings.

These savings were generated by reducing indirect labor associated with moving materials, maintaining old equipment and facilities and supervising a broader manufacturing footprint and also, by improving the efficiency of direct labor.

These savings were masked in 2014 by the $2.5 million onetime effect of lower capitalized overhead due to the significant inventory reduction, which won't recur in 2015. Our restructuring target was for annualized savings of $3.5 million, and we expect to achieve that savings run rate in 2015.

A higher restructuring savings, the absence of the $2.5 million overhead capitalization effect and $1.6 million lower depreciation due to the maturing asset base should all help this business weather the effects of the weaker oil and gas market.

For Services, Q4 revenue was double the prior year and there was a modest improvement in the operating and EBITDA losses. For the full year, our loss was slightly narrower than the prior year on 10% lower revenue. Our focus in 2015 continues to be on managing down our infrastructure costs while we work to secure multiyear service agreements to provide a more consistent revenue base load.

Liquidity is another key focus. In the left-hand table, we show some excerpts from the cash flow statement. Our operating cash flow was very strong in 2013 due to the surge in customer deposits we received to support 2013 and 2014 tower production. In 2014, customer deposits remained stable but we experienced increased inventories, primarily in Abilene, which reduced our operating cash flow to $2.5 million for the year.

As you can see in the graph on the upper right-hand side, our operating working capital as a percent of sales is low, but volatile and highly dependent on both the timing of closing key tower contracts and the consistency of our production flow.

For this reason, we maintain significant cash balances and ample credit line availability at all times.

Turning to investments, capital spending for 2014 was $6.5 million, mainly for completing the restructuring activities and investing in our tower plants to improve throughput. As shown in the bottom right-hand chart, we are still bringing in some cash flow from asset sales linked to our restructuring plan.

Over the past five years, in fact, we have funded 60% of our capital spending with asset sales. At present, with the completion of the restructuring investments, we have our closed Gearing plant and a vacant plant up in Clintonville, Wisconsin for sale, which should together, yield about another $1 million to $1.5 million in proceeds.

Turning now to the balance sheet, at year end, our cash assets totaled $20.3 million, down from both year-end 2013 and the prior quarter, due to the inventory build in Abilene. You can also see the $8 million rise in working capital.

Our net PP&E has continued to decline as our capital investment rate continues well below our asset sales plus depreciation. On the 14.8 million shares outstanding, our net book value per share was $5.95, about 20% above our market cap without ascribing any value to the significant NOL.

As we announced during the quarter the SEC investigation that was initiated in 2010 was settled earlier this month, we're pleased to have this behind us. We are filing our 10-K this afternoon and have successfully passed the first full SOX controls compliance audit since our filing status reverted to accelerated, and our auditor, KPMG, was required to issue an integrated opinion. And our updated NOL carry forward was $174 million at year end.

Looking forward, we are projecting our full year 2015 sales, as Pete said, to rise 6% to 8% to approximately $255 million to $260 million, mainly due to higher tower reduction and some growth in Weldments and Services.

We're cautious about the revenue outlook for Gearing due to the oil and gas market. We expected to generate positive operating income, although the results will be skewed to the second half of the year. And we'll invest $5 million to $6 million in capital, net of asset sales.

Our first half outlook is more uncertain than usual. Because of the supply disruptions caused by the labor slowdowns at the West Coast port and in order not to lose production slots, as Pete explained, we are currently prioritizing our tower build based on the material availability.

What this means is that we are sometimes building ahead of our customer requirements when we have the available U.S. sourced materials. While this will all even out by around midyear, in the short term, it means more inventories, therefore, more working capital and potential uncertainty as to the timing of recognizing revenue, particularly in Q1.

While our Abilene tower operations have clearly improved versus Q4 last year, that improvement will be largely masked in Q1 because the mix of towers we are building today at both plants is heavily influenced by availability of parts.

With delayed revenue recognition on more than $5 million of tower production, our Q1 revenue should be in the range of $48 million to $51 million, and we project an operating loss in the $3 million to $5 million range, which includes about a $1 million adverse effect from the revenue slippage.

As I said, this will essentially all wash out by midyear, but our Q1 and Q2 forecasts are somewhat less predictable than usual, and our working capital is rising today for the same reason. We're likely to begin to draw out our credit line during the quarter. The cash flow should improve sharply in the second half of the year as we invoice and collect for the towers that are being built ahead of schedule.

That concludes my prepared remarks, and I'll turn it over for questions.

(Operator Instructions)

We have a question from Angie Storozynski.

So I wanted to talk about the Gearing business. So I understand that there's, clearly, an impact from the oil and gas business, but the wind industry seems to be picking up and yet it doesn't seem like you're getting enough traction on the gearing side. Is this just basically that OEMs are producing gears in-house? Or what's the issue here?

Angie, I would say most of the gearing that we're selling out of our Gearing business is replacement gearing. So it would be older models, and then we sell a lot of gearing in support of the clipper fleet. Most of the gearing for the wind industry today is actually -- a lot of it's coming out of China, through China high-speed gear and then also Europe.

The wind energy business, I think they're sourcing all of their gearing for their gearboxes offshore from their other plants. So we used to sell a lot of gearing to GE transportation on the wind side, and G.E. moved away from their internal sister company, if you will, and really, have off-shored quite a bit of that.

That's several years ago.

Yes.

Okay, okay. Now on the -- what's the -- does the total capacity of the Tower business is that 500 towers a year?

Yes.

Yes.

Okay. So it sounds like the '15 is now fully booked?

Yes. For all practical purposes, yes.

Okay. And now some -- I mean, we cover a number of Yield Co's and some of the Yield Co's seem to believe that the extension of the PTC through the end of '14 will actually allow them to add wind farms that will qualify for the benefit even in 2017. Do you think that that's a bit of a stretch?

No, I think, what we're hearing out of Treasury is they've modified the language a little bit that I think is more favorable so that one could achieve the credits if they went commercial operation in '17. So I think the Treasury has, actually, been very supportive and tried to enable us leveraging the credit into '17.

Okay. And lastly, I mean, I still see that you're struggling with -- on the Services side. Is this business -- are you dedicated to this business? And do you hope that there will be a turnaround story for it at some point?

Yes, I think the level of activity in Services is way up primarily around gearbox support. So as the fleet is aging, we're seeing more and more customers. You see that our order rate was way up in 2014. The quoting activity is continuing into '15.

So as that fleet is aging, we're finding a lot of customers who are looking for support on their gearboxes and blades. So we certainly recognize that from an operating earnings point of view, it is a drag on the Company but we do see some pretty bright spots with respect to Services. And there is a pull-through on the Gearing side as well.

(Operator Instructions)

Our next question comes from Katja Jancic.

Can you talk a little bit about your expectations for margins this year? And possibly, are there any plans to work on that, to possibly improve them even further?

Would you like to take that?

Sure. Yes. So we expect to improve our gross margin at least 200 basis points this year. In our Gearing business, just the items that we are not going to -- that are not going to impact us -- that impacted us in '14, that is the restructuring and the -- we had a fixed cost absorption thing that happened as a result of all the inventory we took out.

And that -- those factors alone are actually worth about $6 million, year-to-year, so that's -- that's going to be a considerable boost to their margins. And then on the Towers side, frankly, the absence of the kinds of disruptions that we had, the disruption in Abilene is going to be beneficial as well. So it's definitely a focus area, and we want to see that trajectory continue to go up.

You mentioned as one of your 2015 priorities, new product introduction process. Can you provide more clarity on that?

So it's -- Katja, that's really around the issues in Abilene. As you're launching a new product in a factory, making sure that we're trying to reduce as much risk as possible before that hits the shop floor.

So making sure that the quality team and the engineering team understand how are we going to measure compliance with the customer's specifications; making sure that the proper work instructions are disseminated out on the shop floor; looking at any CapEx or any engineering issues in building a new tower; and as well as applying the same concept in our Gearing business and our Services business to make sure that company-wide, we've learned from this mistake in Towers.

So it's really making sure that we're doing a lot more work upfront to retire as much risk as we can with a new product coming into the plant.

You mentioned that, currently, 13 gigawatts are under construction. Is that all already booked? Or is there still opportunity you could get business from that, for that for Towers?

Yes, I think we can -- we will still get business from that and, in fact, in my prepared remarks, I mentioned that there was a lot of activity in the last 2 weeks of the year.

And from some of the industry reports we've seen, it's roughly six gigawatts of orders that got placed in those last two weeks. So the supply chain -- and most of that, I think, will ultimately fall into 2016.

So the supply chain is still being lined up on that six gigawatts and that's why we're feeling pretty comfortable about 2016. And we've been in discussions with all of our customers. So we've got a pretty good feel for what they're looking for from us for '16.

We have no further questions at this time. I'll turn the call back over to Peter Duprey.

Thanks. Clearly, it was a challenging year, particularly in the back half. As I say to our employees, we've kind of hit a speed bump in the back half of 2014. I think we'll -- we definitely are going to learn from that lesson and I think we'll be stronger because of it.

As we look at Gearing and Services, those businesses are both improving nicely in 2014 and would expect that to continue in '15. And then as I look at 2015 and '16 in our Towers business, we think those are going to be very strong years. So I think the future prospects for us are very good, and we look forward to updating you on our progress. And thanks a lot for joining the call.

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