Broadwind Inc (BWEN) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Broadwind Energy Second Quarter 2018 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. Good morning, and welcome to Broadwind Energy's Second Quarter 2018 Earnings Conference Call. With me today are Broadwind President and CEO Stephanie Kushner; Broadwind Chief Operating Officer and President of Broadwind Towers, Eric Blashford; and Broadwind Vice President and CFO, Jason Bonfigt.

This morning's earnings new 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 10-Q and Form 8-K in the attached news release filed with SEC this morning. We assume no obligation to update any forward-looking statements or information.

Having said that, I will turn the call over to Stephanie Kushner

Thanks, Joni, and good morning. We made good progress in Q2. As we indicated in our guidance last quarter, our revenue rose sequentially more than 20% to $37 million, and we generated positive EBITDA of $2.1 million, including the benefit from reversing the final earn-out reserve for Red Wolf. We've turned the corner, we are once again generating cash.

Outside of gas turbines, our core end markets remain strong. Wind installations are growing, and both oil and gas and mining equipment demand are strong. Payouts and trade policies are challenging. We're seeing sharp increases in domestic steel prices, and we're working hard to avoid being squeezed between our customers and our suppliers.

I'm very excited about our progress with customer diversification. We are on track with our target of $40 million in orders from new customers this year, and the sales activity is accelerating. I'm expecting that we will meet or exceed our full year target.

Our liquidity situation is firmed. Our line of credit balance was unchanged during the quarter, and we were in compliance with all debt covenants. Following quarter end, the $2.6 million new markets tax credit loan was forgiven, and we will recognize a gain on that in Q3.

On the next slide, in the first half, we booked $47 million of new orders, down 19% from last year, which started out with very strong tower demand. Although we're down comparatively at the half year point, the comparisons in the second half of the year will be much easier. And I believe we will end 2018 showing some encouraging full year growth.

Gearing orders moderated during the second quarter after customers rushed bookings in Q1 to secure 2018 production slots. Third quarter has started off strong, and we are now building our order book for 2019. The book-to-bill for gears for the first half was a healthy 120%.

Process Systems orders were essentially flat as we continue to experience weak demand for new gas turbine components, in line with our largest customer. But we have seen offsetting growth in orders to support oil and gas production and mining. Our total backlog remains strong at $118 million, of which $68 million is scheduled for delivery this year.

On the next slide as shown on the left, progress has been consistent against our customer diversification target. Included in the $20 million of diverse customer bookings in the first half, our orders from Cat for both mining and construction fabrication plus heat treating for gears. Similarly, we are receiving orders from Komatsu for both heavy fab and for production and aftermarket gearing. Additionally, we are growing our business with NOV for both fabricated vessels produced down in Abilene and for gears and gearboxes made in Cicero. We are excited to expand these commercial relationships, particularly when they extend across multiple Broadwind business units.

We added 14 new customers in the quarter, several of which have multimillion-dollar revenue potential.

On the right-hand side chart, you can see that orders outside of wind customers have steadily increased to an annualized booking rate of about $65 million on a trailing 12-month basis. We have both a strong and diverse manufacturing capability and have reduced our reliance on a narrow set of wind tower customers. Not only are we diversifying our customer base, we are diversifying our industry concentration as well. Having said that, the fundamentals of the U.S. wind market remain strong. The development pipeline for new wind installations grew again in the second quarter and is now in excess of 38 gigawatts.

As shown on the right, the expectation is for new wind farm installations in 2018 to exceed 8 gigawatts with a rise to 11 gigawatts or more in the following 2 years. Even the outlook for 2021 has been revised upward to more than 7 gigawatts.

Now I'm not showing updated outlooks for gears and gas turbines on this call because the forecasts are essentially unchanged from our last update. U.S. gearing demand is up close to 10% in total this year with a 20% or more increase in the demand for gears in the oil and gas market. And gas turbines, which drive demand for Red Wolf are still expected to remain at a relatively weak 30-gigawatt level for total global demand.

Turning to the next slide. As I said, steel tariffs are a definite headwind for us, particularly, for wind towers. Shown on the left is the comparison between Chinese and domestic prices for steel plate. The gap has not improved since our last update call with U.S. steel priced $350 or more per ton above the price of Chinese steel.

Given the usage of a nearly 200 tons of steel in a single tower, this equates to about a $70,000 cost disadvantage for a domestic tower producer. We've historically faced a differential closer to $150 to $250 a ton, which could be largely offset by the cost differential of transporting towers from Asia. But this wider gap represents a challenge for maintaining competitiveness against Asian tower manufacturers, who can use Chinese steel.

While we are protective on towers we are manufacturing today and the preordered steel for the next couple of quarters, pricing pressure will increase if the tariff situation is not resolved or ameliorate into the next couple of months.

The pie chart on the right shows where the steel imports into the U.S. came from in 2017, this is Department of Commerce data. As you can see, NAFTA countries, Canada and Mexico, represented the largest source of imported steel. We're encouraged to see that trade tensions with Western Europe maybe de-escalating as they also represent a significant source of imports.

And both Brazil and South Korea have avoided tariffs by agreeing to export caps. China itself represented a very small source of imported steel into the U.S. However, low-cost Chinese steel finds its way into towers and other products fabricated in a number of other countries, which can put us at a competitive cost disadvantage. We are working on this issue very actively.

Outside of wind towers, our primary focus has been on making sure our quoting and pricing is accurate, and that our material purchases are timely so that we don't inadvertently need to absorb inflation in our material procurement. I think, in general, our management has done a very good job on this.

Turning to the next slide. Our priorities are unchanged for the rest of the year. We're continuing to build momentum with customer diversification. For example, we recently won some fabrication and painting work to support the build of large mobile data centers that house sophisticated computing hardware. This could build into a significant and very diverse product line.

We're making progress with the final stages of our manufacturing footprint reduction. We are under contract to sell a 150,000 square-foot gearing plant that we idled several years ago and where we have recently completed environmental remediation. And with the new market tax credit loan extinguished, we can accelerate our exit from a surplus 80,000 square-foot plant in Abilene, Texas.

Our systems work continues. We want to be sure our quoting, scheduling and inventory control processes are robust and support the scale-up and added complexity of our growing heavy fabrications and custom gearbox product lines.

We are focusing our continuous improvement efforts in gearing and towers, where we want to improve efficiencies in costs in order to expand the margins. And we continue to manage through the complicated and volatile raw material pricing environment.

With that, I'll turn the call over to Eric Blashford, our COO, to talk more about our businesses.

Thanks, Stephanie, and good morning. Orders for the quarter were $9.5 million, a 21% improvement over Q1 and, substantially, above an unusually low Q2 2017. The order improvement is encouraging because it comes from both our wind tower and heavy fabrications product lines.

Our heavy fabrication business, which operates in mining, construction and other industrial markets, utilizes similar manufacturing processes and competencies as those used in our towers business. Our opportunities within the markets served continue to expand. We are considering strategic investments to support further growth and diversification. We sold 201 tower sections during the quarter, up 41% sequentially from 143 sections sold in Q1, but down 24% from 264 sold in the prior year. As a result, Q2 sales were $24 million versus $16.8 million in Q1, and EBITDA was $2.2 million, which was a $2.3 million sequential improvement after a near breakeven Q1.

Our 2018 priorities remain consistent with the previous call. As we've discussed, the pricing pressure resulting from the PTC expiration and new PPAs continues. We continue to have resources focused on offsetting this pressure through process improvements, and our teams made nice progress in Q2.

We have disciplined systems by which we introduce new tower designs into our plant to shorten the manufacturing learning curve and optimize productivity on smaller tower runs as required. So far in 2018, we produced 4 different tower designs, meeting all customer quality and delivery requirements.

We're excited about the fabrication business and our focus on driving profitable growth and improving our capabilities. Efforts include improving our scheduling system to optimize and expand our throughput to accommodate the growing demand.

A large horizontal machining center, which went online in Q1, has generated the expected market interest and is performing well. The combination of this machine, which is the largest of its kind in the region, fed by a high-capacity, high-hook high crane system, supported by a highly skilled and committed workforce with on-site deepwater port access makes Broadwind uniquely attractive to customers seeking precise fabrication of large and heavy weldments such as those, which go on cranes, mining equipment, construction equipment, marine equipment and other industrial applications.

In the third quarter, we expect revenues to be in the $20 million to $21 million range, reflecting a lower demand for tower section production with an EBITDA of $1 million to $1.5 million.

Next slide, please. For Gearing, first half 2018 orders exceeded first half 2017 by 13%. Oil and gas markets remain strong, and we're also excited about recent order growth from our Mining segment customers.

As you can see on the graph that highlights our revenue by market, Q2 oil and gas revenue was at the $5 million quarterly pace, continuing the sharp growth since 2016 and remaining at the highest levels since 2014. The serial nature of production in this segment affords us greater opportunity to refine the production process and leverage continuous improvement efforts over longer production run.

We remain focused on further diversification and expansion into other markets with notable increases in mining and other industrial as mentioned earlier.

Our order book remains robust in the frac gear product area, but we are also seeing encouraging signs of improved demand in the drilling segment.

Q2 revenue is up 41% as compared to the prior year quarter. We had breakeven EBITDA in Q2, which was below our expectations. As the higher activity levels led to unplanned manufacturing variances, including some on legacy gearbox builds. We are seeing some improvement in our supply chain deliveries, but lead times for raw materials and outside services are extending with a strengthening market. We continue to work with our existing suppliers while bringing on new one to ensure a timely supply.

During the quarter, we made a number of changes in our organization structure to more clearly align resources and responsibilities with business needs.

In Q2, we completed a substantial review of our product flow using detailed value stream maths and other lean concepts. We reviewed 22 unique processes, identified several areas of opportunity and have begun to address those. To expedite this process, we are augmenting Brad Foote specific CI resources to support from other divisions.

To respond to increasing gearbox demand and to further our diversification efforts, on June 15, we announced the formation of the Brad Foote custom gearbox division. Brad Foote has produced gearing and gearbox systems for over 90 years. Our offering works directly with the customer to identify and optimize the product design and its manufacturability. This strategic shift better aligns our organization to focus our internal technical and design capabilities to help our customers produce more reliable and efficient gearboxes that lower the total cost of ownership.

I'm excited about this organizational structure change and believe it will help expand our business into more proprietary offerings.

We expect revenues in Q3 to be up modestly in the $9 million to $9.5 million, with positive EBITDA near 5%, on a path to a more acceptable margin profile.

Next slide, please. Process Systems. Orders for the quarter were $3 million, down significantly from $4.4 million the prior year, due to weaker demand for natural gas turbine parts and oil and gas equipment. Orders for natural gas turbine parts did improve in June and continue at a stronger pace in early Q3. However, our expectations are moderated as our primary customer continues to indicate short-term market challenges.

Revenue was within guidance at $4.1 million, but down sequentially due to lower part sales for natural gas turbines. Our EBITDA loss narrowed to $200,000. We continue to focus our resources in consolidating all Abilene manufacturing operations into our Tower's facility as we execute our plan to exit our Abilene fabrication and CNG facility in early Q4.

This consolidation will improve both our production flow and our manufacturing cost structure. Red Wolf remains focused on leveraging our expertise in outsource solutions and services to diversify and grow into other high-growth markets. We understand our unique capabilities and value proposition and are using this knowledge to more quickly identify and qualify sales opportunities.

In Q3, we expect to be in the $4 million to $5 million revenue range with approximate breakeven EBITDA.

I'll now turn it over to Jason for his comments.

Thanks, Eric. Consolidated sales were in line with our guidance at $36.8 million in the current quarter, a $6.8 million sequential improvement over Q1, and following a challenging Q4 on the production at our tower plants were at historical lows. Q2 was a second consecutive quarter of sales growth, primarily driven by elevated demand from our primary tower customer.

Gross margins improved to 6% from breakeven in our first quarter due mostly to the volume recovery and productivity improvements in our tower business. Year-over-year gross margins were 290 basis points lower, driven primarily by a 24% reduction in tower section sold and mix of tower production. Partially offsetting these factors were reduction of overheads and a continued attention on productivity.

We are focused on further productivity improvements to remain competitive and help offset mix and pricing pressures in a challenging tower environment.

Operating expenses were $8 million for the quarter versus the prior year of $4.4 million. And the current quarter includes a $5 million noncash goodwill impairment associated with the Red Wolf acquisition, partially offset by the release of a $1.1 million reserve for the final earn-out estimated liability.

Excluding these one-time items, we achieved 6.5% reduction versus the prior quarter and our first quarter. Although GAAP requires testing goodwill on an annual basis, we determined that the combination of the release of earn-out reserve and continued near-term weakness with our primary natural gas turbine customer warranted a reevaluation of the carrying value of Red Wolf.

Red Wolf's primary customer has announced significant reductions in their order intake over the past year and well below their historical run-rates and previous guidance, which we contemplated in our original valuation. The shorter-term weakness coupled with at 19% embedded discount rate, required us to impair 100% of the goodwill.

Given that their earn-out targets have not been met, we will have paid $16.5 million for a business that has generated $1.1 million of EBITDA to-date, albeit, in a challenging environment.

We continue to believe in the thesis of this investment as the diversification of the natural gas turbine market should provide value long-term.

We generated $2.1 million EBITDA for the quarter in line with our guidance, which includes the release of the final Red Wolf earn-out reserve of $1.1 million benefit.

For Broadwind consolidated, our third quarter earnings outlook is similar with revenues projected at $34 million to $36 million and EBITDA of approximately $800,000 to $1 million.

Next slide, please. Our cash conversion cycle improved for the second consecutive quarter to 36 days from 48 days at year-end 2017. Managing working capital is a key priority throughout all layers of our organization. And we have made significant progress managing DSO following a challenging Q4, where our customers delayed scheduled payments into 2018, which then spiked our DSO to 70 days.

The continued focus on DSO has led to a 26-day reduction since year-end or approximately $10 million of cash flow impacted associated with the reduction, assuming DSO was held constant at our higher revenue levels.

Our tower customers continue to provide deposits although with a shorter lead time relative to project start dates, which has increased our working capital requirements. We're placing an emphasis on receiving deposits from our Gearing customers into a number of factors including continued strength in our end markets, extending material lead times, and volatility in material pricing.

Lastly, we're enacting more stringent deposit requirements on custom gearbox orders in our gearbox division, which is often more working capital intense due to longer design and production cycles.

Our inventory turns are improving primarily driven by improved throughput in gearing and recovery of production levels in our tower plants. Operating working capital is flat quarter-over-quarter at $14.3 million and up modestly over year-end. The increase is generally attributable to increased tower production levels. Our operating working capital cents per dollar of sales decreased for the second consecutive quarter from $0.12 to $0.10 and is indicated in [the turn] on the right within a comfortable range.

As Stephanie mentioned earlier, following the steel tariff announcements earlier this year, domestic steel prices have escalated, which has created a significant gap in price between domestic and Chinese supply. To bridge this gap, we're planning to purchase steel at favorable terms early in the second half of 2018, which will increase our working capital requirements.

Shifting to our balance sheet. Our total debt was $21.3 million as of June 30, and flat with Q1. Our debt balance includes $3.7 million of debt and capital leases, $3.2 million of forgivable loans and our line of credit usage. Year-to-date, we have received $1.4 million of proceeds on new equipment financing.

As previously communicated, in July, the new markets tax credit transaction matured and the debt was forgiven reducing our debt balance by $2.6 million.

As a result of the debt forgiveness, we will record a noncash $2.2 million gain in Q3, which is net of transaction expenses. More importantly, the forgiveness of this debt removes restrictive covenants that allows us to consolidate activities in our Abilene facility, and exit an underutilized facility at the end of this year. A facility with approximately $600,000 of annual operating cost.

Our line of credit balance was flat sequentially at $14.5 million, which was accomplished by the effective management of our working capital during higher levels of production in our plants and prudent capital investment. We had an additional $10 million of availability under our $25 million credit line with the CIBC. And as I mentioned earlier, we plan to opportunistically to purchase steel at favorable prices in the second half, so we anticipate our working capital requirements to increase as well along with usage under our line of credit.

This morning, we filed a prospective supplement including an at-the-market offering or ATM, which allows us to sell up to $10 million of our stock at prevailing market rates. We determine this to be a prudent action as the mechanism should provide us with additional flexibility and strengthen our balance sheet to opportunistically purchase steel earlier than usual with favorable terms or to support working capital requirements associated with growing our businesses. Our cash flow statement in our 10-Q that we filed before the market opened this morning states that we had $1.7 million of purchases of PBE, which is primarily the residual cash paid for 2017 CapEx projects, notably for the completion of our Abilene facility expansion and investments in our fabrication division to support its growth. Lastly, we do not have any significant capital investments scheduled for 2018 and are managing to a 1.5% to 2.5% of revenue run-rate, which should be considered more of a maintenance CapEx rate for our businesses going forward.

That concludes my remarks, and I'll turn the call back to the operator for the question-and-answer.

(Operator Instructions) And our first question comes from Chris Morgan with Macquarie.

This is actually Angie Storozynski from Macquarie. So just a couple of questions. So just -- so I understand it, in the past you guys rarely purchased steel, right? It was typically being provided by your customer. So this is a change in your approach here just to entice your customers to use you to actually manufacture towers? And also given that the price spike in U.S. steel has already happened, how can you lock-in attractive prices for steel? Are you trying to source it from abroad?

So as you know -- so the first part of your question. No, we have -- in almost every instance, we have been the ones buying the steel. We have -- maybe in our early days we had some cases where our customer was specifically supplying the steel, but we haven't done that for some time period. In terms of buying in advance, we're not sure exactly what model of tower that the steel that we placed orders for is going into. But we know -- but we will know in time to be able to utilize it. And then, in terms of timing, I think like most other manufacturers I think across the U.S. -- I think this is something that it's maybe not broadly, no -- but most folks had steel and material contracts in place for a certain amount of time. And I think, for the most part, those are starting to expire and that's probably why there's more noise in market right now for companies like ourselves, who're using -- who are having to buy a lot of the steel fabricated, but that -- still we're buying is domestic steel in this case.

So my second question on the gas turbines and equipment and maintenance. So I understand that there is some slowdown in new build activities for gas side plants, but how about maintenance of existing assets? It seems like gas plants are running more and as such there should be more of a need for either major maintenance like seasonal maintenance, is that not what you guys are dealing with as well?

I think that our customer was more focused on the kind of these big upgrades, and I think there is less activity in those. I think you are right about the kind of ongoing maintenance, and we're -- that's one of the areas where we're focused on kind of expanding our customer base to get into the -- to sell to the guys who're doing what I would call the more routine maintenance on the gas turbine. But that has not been a focus area for -- in the past for our largest customer.

Okay. And just going back, I'm sorry, to the other question about imported towers. So -- okay, so is there -- I mean, do you have a sense, for instance, what the price point is about when you incorporate transportation costs, you would actually need to offer those towers at in order to encourage domestic construction of towers? I mean, would that allow you to actually earn a positive return from at least an EBITDA perspective? I mean, so even pricing in that somewhat lower cost of steel that you have from long-term contracts, is this enough to offset the all-in cost appeal of those important -- imported towers?

Yes, it's not cut and dry. So it kind of depends where the wind farm is going in. So if the wind farm is very close to the coast, for example. And we have this $350 a ton price differential. It's much more challenging. But the further the wind farm is interior in the U.S., and frankly, the closer it is to our plants, the more that decision swings in our favor. So it's a dynamic situation, a lot of it depends on the location. Probably, the other thing that matters too is the cost of transport from overseas, which also varies depending on fuel prices and ship loading. So there are lots of variables, but we're trying to work it -- get as many of those variables in our favor as we reasonably can.

And the last question. I probably should know it myself, but what is the lead times? For instance, if I have wind farms with starting commercial operations at the end of 2019, when would they procure towers?

Angie, this is Eric Blashford. That depends, but it can be up to 6 months in advance. It can be as narrow as maybe 4 months in advance. 20, 25 weeks and that -- a lot of that has to do with material lead times.

(Operator Instructions) I'm showing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Stephanie Kushner for any closing remarks.

Thanks. Thanks, very much, for letting us to update you on our progress and for your interest. And we look forward to speaking to you again, next quarter. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.