Broadwind Inc (BWEN) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Broadwind Energy Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Joni Konstantelos, Director of Investor Relations. Please go ahead.

Thank you, Denise. Good morning, and welcome to Broadwind Energy's Third Quarter 2017 Earnings Conference Call. With me today are Broadwind's President and CEO, Stephanie Kushner; and Broadwind's Vice President and CFO, Jason Bonfigt. 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 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 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 Stephanie Kushner.

Good morning, and thank you. We reported reduced revenues of $30 million for the quarter, as we experienced a sharp drop in Tower production volumes caused by a reduction in second-half demand from our largest customer. Sales for both Gearing and Process Systems grew, which partially compensated for the Tower weakness. Although, the fourth quarter is even more challenging, our Tower revenue will begin to normalize beginning after the first of the year.

In Gearing, we continued to see strong demand from oil and gas customers, primarily for frac Gearings, but there are early signs that other parts of the industry are coming back as well. And mining is, clearly, on a recovery path, so we expect that to represent a growing part of our bookings going forward.

We shipped $7.5 million in Gearing and reported positive EBITDA for that segment, but fall short of positive operating income, due to additional maintenance, tooling and training costs to support the ramp up. We will make further progress in the fourth quarter.

Process Systems achieved profitability in the quarter on $6 million of sales. Red Wolf results were accretive, but the business is being impacted by weaker-than-expected sales into the gas turbine aftermarket. Therefore, we are not likely to pay an earn-out just to the sellers for, at least, the first year.

We've been managing our costs proactively during the Tower weakness and reduced our manufacturing overhead and operating expenses by another $1.1 million, sequentially. Our liquidity remains sound as we navigate through this challenging period. We successfully reduced our working capital during the quarter, which reduced the borrowings on our line of credit to $8 million. We had $12 million of availability on the line at quarter end.

Tower bookings continued very low in the quarter as our largest customer did not purchase volumes in excess of the multi-year baseload agreement, which averages approximately $12 million per quarter. We did receive a prototype order from a new customer, consistent with our focus on diversifying our customer base.

As I said, Gearing orders remain strong. Our commercial organization has done a very good job expanding their customer base, not only in the strong oil and gas market but with other industrial customers as well.

In Process Systems, bookings totaled $5.3 million, rebounding, somewhat, from $4.4 million last quarter. At September 30, our ending backlog was $143 million.

Next slide. The U.S. wind market continues to show significant momentum. As you can see in the left chart, wind power capacity under construction or in advanced development between now and the end of the decade rose a further 27% in the quarter.

Like last quarter, more projects entered the development pipeline then were commissioned, so the backlog is building. We expect the normal Q4 completion surge to occur and the backlog to decline somewhat before year end, but remain strong to support the next several years of development activity.

As shown in the right side diagram, following a dip this year, installations are expected to surge between now and the end of the decade. However, completions are back-end loaded with more than 12 gigawatts expected to come online during 2020. Although, turbine awards have begun to accelerate, turbine model decisions have still not been awarded for about half of these projects.

The domestic Gearing market remains strong, following a low point in 2016 of about $2.8 billion, the overall market is growing at more than 5% per year. And as shown on the right, our areas of market focus: power, oil and gas and mining are at the higher end of the growth spectrum. We have rearranged the flow in our Gearing plant to produce various gearing configurations more quickly and efficiently so that we can be more responsive in these strong markets.

Turning to natural gas. Red Wolf predominantly sells into the gas turbine market, either providing components for new turbines or for repairs and retrofits. As shown here, new utility-scale gas turbine orders totaled about 42 gigawatts in 2016. Market forecasts have projected about a 5% drop in orders this year, down to about 40 gigawatts. As you can see in the inset box, however, first half orders have run materially behind 2016, so either the sales are more back-end loaded than usual or there is a larger than 5% year-over-year decline in 2017. Some of this weakness is being attributed to renewables garnering a higher market share.

For Red Wolf, year-to-date orders for content per new gas turbines have been about flat versus prior years. Although, again, lower in the U.S. market and higher overseas. However, we continue to see a significant reduction in orders for the aftermarket, which has, historically, represented about 2/3 of Red Wolf's sales. To date, these orders are down by more than 50%, reflecting much lower rebuild and upgrade activity by our largest customer.

I've not included an update for the CNG market, as little has changed from last quarter. We continue to see very low activity in this market due to a tight spread between diesel fuel and natural gas prices.

I'll turn it over to Jason.

Thank you, Stephanie. Turning to Slide 8. Sales for the quarter were $29.6 million, in line with our guidance of 30% lower than the prior year, primarily driven by a 63% decrease in Towers sold, a result of our Tower customers' reduced purchases in order to drawdown (inaudible) component inventories. Partially offsetting the Tower segment decline were additional sales associated with the Red Wolf acquisition and continued strength in end markets that our Gearing segment participates in.

Leading up to Q3, we had favorable sales comparisons that were primarily driven by the Tower demand to support the PTC qualification factors. However, the lowered Tower production levels moved our year-to-date comparison down approximately 3% versus the prior year. Gross profit margins reduced to 3.4% from 12.5% last year, primarily result of low Tower facility capacity utilization. And we had an operating loss of $1.8 million in the quarter and a $900,000 of EBITDA, both well below previous quarter run rates, but in line with the guidance we outlined last quarter. The EBITDA result included the release of the $1.4 million contingent earn-out liability related to that Red Wolf acquisition, which was based on our most recent EBITDA forecast being below earn-out threshold levels.

Conversely, we had several unfavorable items that we are classifying as other production shift impacts or other nonrecurring items. These included approximately $250,000 of Tower materials written-off due to a discontinued Tower design, $300,000 of adjustments related to increases in claims cost associated with the previous period's self-insured workers' compensation programs. And a residual impact of a self-insured healthcare insurance associated with the reduction in workforce.

Lastly, we incurred an additional $300,000 to $400,000 of Gearing plant ramp-up cost related to supporting the significant order growth we have seen in 2017. Year-to-date, EBITDA is $6.7 million versus $7.1 million in the prior year comparison. I would note that despite the Tower volume declined, EBITDA margins have only slightly declined year-over-year, highlighting the swift overhead reduction efforts made in response to the Tower demand decline and the benefit of improved operating performance.

Loss per share for the quarter was $0.14. Again, in line with our guidance. Year-to-date, earnings per share is $0.25, which includes the $0.34 income tax benefit associated with the Red Wolf acquisition.

Transitioning to Slide 9. As previously -- as noted previously, the multi-year base low Tower order was received in 2016. We will only report new orders when volumes exceed the minimum contract amounts. And for the quarter, we had a new customer order for a prototype tower being produced in Q4. And additionally, on the Weldments side of the business, we had an uptick in orders and are encouraged that the mining in other industrial markets are gaining momentum.

Towers sold for the quarter were less than half of Q2, down to 42, and down 63% compared to the prior year. This reduction was partially offset by more complex, higher material content towers. And as a result, sales were $16 million, in line with guidance and down 57% year-over-year. Our customers are continuing to [releave] excess inventory that has accumulated over the past few quarters. We've taken swift actions to reduce our overhead and operating cost in response to the volume decline in both of our plants. However, we are balancing this against our need to support 2018 production level increases and using the production decline as an opportunity to improve the capabilities of our workforce and complete our expansion project.

Operating loss was $1.5 million and the segment had a small EBITDA loss during the quarter. Despite the Q3 softness, year-to-date EBITDA margins remain near 11%. Our objectives haven't changed, as previously mentioned, we continue to focus on improving production processes and are assisting our customers with cost out efforts. We're expecting to ramp up the Abilene expansion and efficiency investment in Q4. This is slower than originally planned as we've intentionally slowed progress, given our production volumes. But we continue to see this project as important to future performance as the expansion adds approximately 50 towers of capacity.

In the region, the country were expected strong near-term demand. The project will also improve plant flow and reduce future production risks. And we continue to be focused on diversifying our customer base and filling excess plant capacity. We are encouraged by rebounding volumes in 2018, however, our tower demand in Q4 will represent a low point for the business and we expect revenues to be in the $4 million to $5 million range with a $4 million operating loss.

Next slide, please. In our Gearing business, order growth continues to be strong with oil and gas customers, with orders near $10.6 million, up nearly 5x over the prior year. Backlog is near $22 million, double that of our year-end 2016 amount.

In Q3, we started to see the pull through of increase order demand with revenue at $7.6 million, up 65% year-over-year. The shipment levels were lower than previous guidance as we worked through extended material lead times from our vendors and sizing the workforce to align with production levels. As a result of volume increases and the productivity efforts, operating loss narrowed year-over-year to $400,000 from the $700,000 loss, and generated positive EBITDA.

As I mentioned previously, we had a ramp-up cost which we estimate at $300,000 to $400,000 of additional tooling employee training and machines to support increased usage of SAW manufacturing, which will enable further improvement in plant utilization.

On the bottom left side of the slide, we show historical revenue by end markets served, oil and gas orders continue to be strong market for us and you could see that in 2014, at peak oil prices, we shipped approximately $20 million of oil and gas Gearing. But we are leveraging our commercial organization in other markets and are generally seeing improvements across most end markets. The mining recovery is developing, and we are seeing activity strength on our front-end processes and are optimistic for recovery next year.

Our current objectives include the continued focus on CI events to improve our production flow, including optimizing cells and improving our equipment uptime rates. We expect to be EBITDA positive for the year and trending towards positive operating income. We have made steady progress on our environmental remediation of our idled Gearing facility. We're optimistic that our remediation efforts will conclude in Q4, which could result in the release of a portion of our environmental reserve. Following this remediation, we will look to complete our restructuring effort that was started in 2014 by selling the facility and lowering our operating cost further.

Our Q4 outlook shows continued top line growth, with revenues in the $9 million to $9.5 million range. Leverage will improve on the additional sales and we expect to generate EBITDA in the 7% to 9% range and have positive operating income.

Moving to Slide 11. Our Process Systems segment, which consist of Red Wolf and our CNG business, took $5.3 million of orders, a 20% increase sequentially over last quarter. Orders from oil -- orders from gas turbine customers were flat, however, improvements in mining equipment demand and the addition of a new oil and gas customer led to the quarter-over-quarter improvement. CNG orders were 0 for the quarter, given the lack of diesel to natural gas spread, which is paramount to the economics of the CNG equipment demand.

Sales were $6.1 million, up from $3 million in Q2 as we had more stable deliveries of our natural gas content orders and the shipment of a stock CNG unit. And EBITDA improved in the quarter to $0.6 million -- $1.2 million improvement over Q2, primarily driven by increased volume. Our focus continues to be on integration of the Red Wolf business and how we'll leverage these competencies further into the gas turbine and adjacent markets. And we are evaluating our procurement processes to support further scaling of the business. We expect Q4 sales to be in the $5.5 million to $6 million range with a breakeven EBITDA.

Next slide, please. Our cash conversion cycle was flat with Q2, and is within an expected range, given the lower level of deposits that we received from customers as of 9/30. DSO was down to 29 days from 45 last quarter, which is often driven by the timing of customer receipts. And we are current -- encouraged by our inventory management. Consistent inventory turns near 8 indicate strong performance by our segments, given our typical production and cycle times.

Operating working capital decreased from $23 million last quarter to $15.5 million in Q3, primarily result of the declining volume levels. This is visible on operating working capital and historical trend chart on the right side of the slide, where operating working capital cents per dollar sales was flat at $0.13. I'm expecting our 12/31 working capital dollars to be near Q3 levels, and within working capital, inventories -- inventory levels are expected to rise due to increased Q1 tower production volumes, but that should be funded by increased customer deposits.

Borrowings under our $25 million line of credit with CIBC totaled $7.8 million for the quarter, down from $13.7 million at 6/30. Despite the lower inventory and AR levels in the business, we had an additional $12 million of availability under the line, primarily driven by $10 million of fixed assets that are included in that borrowing base. We expect our availability under the line to be sufficient as we manage through a challenging Q4 and a Q1 ramp-up in production. We expect to receive deposits from our customers in Q4. We'd expect this deposit balance to increase 3x into year end.

CapEx slowed to $1.7 million in Q3 and is approximately $6 million for the year. The Abilene expansion and efficiency investments are nearing completion and remain on track for full year at CapEx in the $7 million to $8 million range. And as we look into 2018, we're managing the CapEx running closer to our historical norm, near 2% of revenue and we're expecting the capital to be allocated based on further improving our production processes or supporting profitable Gearing growth.

That concludes my remarks. Now I'll turn the call back to Stephanie.

Thanks. Our fourth quarter outlook is for very weak Tower revenue and total Broadwind revenue of $20 million. At this curtail production rate, we expect an EBITDA loss of $2 million to $3 million. Our visibility improves after the beginning of the year when revenue should begin to normalize. We should see sales back in the $30 million range in the first quarter and then [about] $40 million by the second quarter. This will have been a very difficult second half for Broadwind, and our vulnerability to a change in production schedule for our largest customer reinforces for us the urgency we have to expand and diversify our customer base at every level of the business.

In Towers, we expect to add 1 to 2 customers next year. In Gearing, we've done a nice job of diversifying and it's showing up in our numbers. Our commercial focus there is also to broaden our participation across industries. And our Process Systems business needs to grow outside of the gas turbine market and beyond are dominant customer. I'll be reporting back on the progress during upcoming quarters.

Looking ahead, we're focused on achieving consistent profitability in gears at a $9 million to $10 million quarterly revenue run rate. And in Process Systems, we are launching a new cable product this quarter and also continuing to folk -- focus on customer and product to diversification opportunities.

We expect to enter 2018 with the wind at our back for all 3 business segments. I look forward to being able to report a return to profitability in the middle of next year.

Thank you. I'll turn it over to Denise to moderate questions.

(Operator Instructions) The first question will come from Justin Clare of Roth Capital Partners.

So first off, we saw that Siemens Gamesa announced a turbine order for over 780 megawatts or 300 towers for the U.S. market today. Can you just update us on your discussions that are ongoing with the company, post-merger? And whether you expect to be able to supply the towers for this order? Or what the potential is there?

Certainly, yes. The information flow and our visibility have improved very significantly over the last several weeks. And although I can't say exactly how many of those towers we will be building, certainly, that's good news and many of those projects we've been discussing.

Okay, great. And maybe turning to pricing. It appears that pricing declines for wind turbines in the U.S. may have recently accelerated. And Siemens Gamesa also did announce a write-down of inventory as a result of pricing pressure. I was wondering if you could just talk about the pricing environment for towers and whether you're seeing increased pressure from customers?

Yes, we began seeing increased pricing pressure probably earlier this year and it's something that we've focused and been working on, frankly, for more than a year. And that is 2 things: one, proving our production processes and our efficiencies, and also working with our customers on the design of their towers to improve the manufacturability. So we're working in both areas. Our hope is to offset much or even all of the pricing pressure. And -- but definitely, we're partnering with our customers so that everybody wins in what is a weaker pricing environment.

Okay, got it. And then as we look into 2018, you're expecting revenue growth in Q1 and Q2. Can you share how much of that revenue growth is expected to be from the Tower segment?

We are just working on our operating plan right now, so it's maybe a little bit premature. I think I did talk about Gearing. We think Gearing will -- should go into the year and progress in that $9 million to $10 million quarterly level so as -- we're starting to get some traction with our other welded fabrications. But as you can imagine, that much of an increase -- a lot of that increase is going to come from the Tower business.

The next question will come from Jeff Osborne of Cowen and Company.

Couple of questions. The OpEx run rate, first of all, where was the $1.4 million -- the reversal of the earn-out? Where is that in the income statement? Is that an offset to SG&A? And we should think about much higher levels of SG&A going forward?

Yes, Jeff, that flowed through SG&A under our corporate segment reporting.

Got you. So there was that, and then if I heard you right, there's a couple of hundred thousand dollars of extra training expenses as well that you had this quarter that probably isn't repeatable in the coming quarters? Is that right?

That would have been in fixed overhead because that was labor-related.

That was in COGS, got it. And then, I guess just following up on the last question from Ross, how do we think about, I guess the visibility? It sounds like you're still working on the operating plans, Stephanie. But I guess what gives you the confidence that the towers will return in Q1 and Q2 versus, just for argument sake, the middle of next year? Is it the improved discussions you've had with your lead customer that gives you that line of sight or something else?

Yes. Yes, we're starting to get visibility into production planning and operational expectations for 2018 and that's what has given us that comfort.

Got it. And then I found it intriguing that you mentioned 1 to 2 new customers as a goal for next year, certainly, diversification would help. I guess what's the strategy and plan of attack there? I heard you talked about a prototype unit this quarter, which is encouraging. But I guess what's the evaluation process of that prototype? And how quickly it could lead to greater level of orders?

Jeff, over the years, Broadwind has built towers for just about every turbine customer -- every turbine manufacturer. So for us, it's about the communication, the bidding process and the dialogue with those potential customers.

And then how long would that prototype be take -- how long would your customer evaluate that? Is that something that may be in 6 months you could see actual firm orders for it, if they're pleased with the prototype?

It's probably too soon to say. I think we'll have more to say on that, probably at the next quarter.

Okay. And then the last question I had, if you don't mind, it's just on -- back on Red Wolf. I guess, just how do you gauge the reduced activity at Red Wolf's historic primary customer versus a potential, just for argument's sake, of a lost market share or some other variable there? Is there a way that you've gotten visibility from them that, "hey, things are a bit slow and you're still our primary partner" as we have these aftermarket components that you could serve?

Yes. We spent a lot of time digging into that to understand and we know the majority of the downturn is linked to lower activity in their part. Although, to be fair, we can see one area that -- where there is a new competitor in that is taking some market share from us. But I think it's something on the order of (inaudible) well, I don't know that number at my finger, but it's probably a quarter of the reduction. On the other hand, there are areas where we're trying to make inroads and pull back share ourselves. So I think there's some normal market dynamics going on there.

(Operator Instructions) The next question will come from Chris Morgan of Macquarie.

Stephanie, congrats on the completion of integration. You had mentioned that the Red Wolf customer and product diversification might be going a little bit more slowly than previously planned. Can you please provide a little bit more color on that front, such as the products you were hoping to be [in queue] by now that maybe you aren't quite yet?

Probably the -- we're proceeding on a couple of fronts. One is to do work with other gas turbine customers and we have discussions ongoing, but that has not yet translated into a new order flow. And then the other one is tower internals. Because the market has been weak, it's been a tough time to start picking up business. But again, we are persistent. We know that's not a very well served market. So we expect to see some traction in the next year or so.

Okay. Now do you have a sense of how much the tower demand (inaudible)

I'm sorry you cut out and -- you're cutting in and out.

Okay. Do you have a sense of how much of the tower demand weakness is due to idiosyncratic issues with a key customer versus the general industry weakness?

Well I think -- maybe you can see on the -- one of the graphs we showed, there was definitely a dip. There's definitely a dip in builds this year. And also there was some buy-ahead as a result of the PTC qualification. So we have trouble -- and then on top of that, our 2 largest customers merged. So it's hard for us to separate those into pieces, but all 3 have contributed to some of our difficulties this year.

Okay. And then on CNG. You had mentioned that diesel gas spread (inaudible) but is there any other color you could provide on (inaudible) progress improving your (inaudible)?

On improving our?

CNG product client performance?

Yes, I mean, we're definitely -- we're having a tough time with that product line because we are a relatively new entrant and the actual CNG station activity is down probably 80% from where it was when we entered the market. So while we think we've got a good product and we've captured a couple of customers, it's just -- the level of activity is just not what we would have expected, again, in large part because of the economics.

And at this time, but we conclude the question-and-answer session. I would like to hand the conference back over to Stephanie Kushner for any closing remarks.

Thanks, Denise. And thanks for your interest. This was a tough quarter for Towers, but I'm happy to report some solid progress in our other segments. We expect Q4 to be our low point, but then for our revenue to normalize beginning in 2018. And we expect 2018 to be a stronger year for all 3 segments. Thank you, again.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.