Broadwind Q3 2023 Earnings Call Transcript

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November 13, 2023

There are 7 speakers on the call.

Operator

Greetings and welcome to Broadwind's Third Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Operator

Tom Giacconi. Thank you. You may begin.

Speaker 1

Good morning, and welcome to the Broadwind Third Quarter 2023 Results Conference Call. Leading the call today is our CEO, Eric Blashford and I'm Tom Ciccone, the company's Vice President and Chief Financial Officer. We issued a press release before the market opened today detailing our Q3 results. I would like to remind you that management's commentary And responses to questions on today's conference call may include forward looking statements, which by their nature are uncertain and outside of the company's control. Although these forward looking statements are based on management's current expectations and beliefs, Actual results may differ materially.

Speaker 1

For a discussion of some of the factors that could cause actual results to differ, Please refer to the Risk Factors section of our latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non GAAP financial measures discussed during our call in the press release issued today. At the conclusion of our prepared remarks, we will open the line for questions. With that, I'll turn the call over to Eric.

Speaker 2

Thanks, Tom, and welcome to those joining us today. We delivered a strong Q3 performance, yielding significant year over year increases in revenue, net income, Margin realization and adjusted EBITDA. We generated double digit revenue growth year over year in all segments With our largest segment, Heavy Fabrications, realizing 25% revenue growth due to improved demand for wind tower sections, augmented by shipments of our new high flow natural gas pressure reduction systems or PRSs. Our results benefited from a combination of improved operating leverage, price discipline, a higher value sales mix In improved process efficiencies, including early benefits from our recent investments in coatings automation and weld prep technology. These actions, plus the benefit provided by the IRA's advanced manufacturing tax credit, resulted in adjusted EBITDA of more than 13%, an improvement of over 900 basis points versus Q3 2022.

Speaker 2

Continued stability across our wind and diverse non wind markets has contributed to improved visibility across our business as we look for the remainder of this year, leading us to reaffirm our adjusted EBITDA guidance for the full year 2023. We booked $16,000,000 of orders in the 3rd quarter, down from $84,000,000 in the prior year, due primarily to the timing of tower orders, As a major customer placed a large longer term order in late 2022 had pulled forward what had historically been Partially offsetting this decline in tower orders Was a 47% increase in Industrial Fabrication orders, primarily from the mining sector. Gearing orders were down approximately 80% from the prior year due to reduced demand from oil and gas and industrial customers, while orders within our Industrial Solutions segment declined 20% due to the timing of demand for new gas turbine content. Entering the Q4, we continue to operate on plan. We're focused on expanding our product mix within higher margin adjacent markets, both the development of our low flow PRS unit, including an RNG version on track for release in 2024.

Speaker 2

We are also continuing with our new Technical advisory sessions, during which we provide our gearing customers with on-site diagnostic, maintenance and service training to help optimize the performance, reliability and longevity of their equipment. These sessions have led to increased repair and replacement service orders from both new and existing Year end customers. Operationally, the lean operating principles, process controls And continuous improvement projects we've implemented at all locations are showing good results in asset utilization and productivity. Our relentless focus on team member safety, quality systems and skills training has allowed us to continually meet the quality and delivery performance much valued by our customers. We generated total revenue of $57,000,000 in the 3rd quarter as we experienced increases in all divisions.

Speaker 2

We generated $7,600,000 of adjusted EBITDA in the quarter, an increase of approximately $5,700,000 versus the prior year period, continuing the strong performance we've seen this year so far. Our consolidated backlog At the end of Q3, it was approximately $220,000,000 up $89,000,000 from the prior year period. Coating activity in our non wind markets Remain stable and we expect good order flow to continue through the balance of this year, notwithstanding the softness in the oil and gas year market. Within our Heavy Fabrication segment, Q3 revenue was $38,000,000 A 25% increase year over year led by increases in wind tower sales and our proprietary natural gas pressure reducing systems, offset by reductions in our mining, construction and industrial markets. Gearing revenue was $11,000,000 a 12% increase year over year as customer activity continues to be strong within both the Industrial and Steel sectors.

Speaker 2

Industrial Solutions revenue $7,000,000 up 85% year over year, led by increases in new gas turbine content to both domestic and international customers. In summary, I'm pleased with the operating performance of all divisions through the Q3 and look forward to continuing this momentum through the remainder of the year as we continue to execute our strategy. With that, I'll turn the call over to Tom for a discussion of our Q3 financial performance.

Speaker 1

Thank you, Eric. Turning to Slide 5 for an overview of our 3rd quarter performance. We had a strong Q3. We experienced both sequential and year over year growth in revenue, gross margin and EBITDA. In Q3, we recognized $7,600,000 of EBITDA compared to $1,900,000 in the prior year Q3.

Speaker 1

The $5,700,000 EBITDA increase and improved margin realization is due primarily to the benefits attributable To the Advanced Manufacturing Production Tax Credits or AMP credits, we've been earning this year associated with our wind tower production, Together with solid overall operational execution, we generated net income of $4,400,000 or 0 point 2 zero dollars per diluted share in the 3rd Turning to Slide 6 for a discussion of our Happy Fabrications segment. 3rd quarter revenues were $38,300,000 up both sequentially and versus the prior year quarter. We recognized 190 tower sections in the current year quarter versus 138 in Q2 and 145 in the prior year Q3. These increases were largely driven by the 42 tower section sold from our Manitowoc facility, which had lower sections sold in the comparable periods. During the Q3, we recognized segment EBITDA of $6,900,000 an improvement of $5,400,000 versus the prior year period, primarily driven by the increased tower section sold and the AMP credits recognized in the current year period.

Speaker 1

Turning to Slide 7. Gearing orders slowed significantly in Q3, totaling $3,000,000 a $12,500,000 or 81 percent decrease versus the prior year quarter. The majority of the decrease attributable to the reduction in oil and gas demand that we've been experiencing. Segment revenue was 11,400,000 up $1,200,000 compared with the prior year Q3, but EBITDA decreased $300,000 to $900,000 due to a less profitable mix of products sold and higher overhead costs when compared to the prior year quarter. Turning to Slide 8 for a discussion of our Industrial Solutions segment.

Speaker 1

Industrial Solutions had a strong third quarter, The highest revenue total since Broadwind's acquisition of Red Wolf in early 2017. While orders of $4,900,000 are down both Sequentially and versus the prior year Q3, our backlog of $15,400,000 still remains at an elevated level and represents the 3rd highest quarterly total since acquisition. We continue to see strong demand for our core natural gas turbine offerings. 3rd quarter segment revenues increased to $7,400,000 from $4,000,000 in the prior year period, reflective of the record high backlog we entered the Q3 with. EBITDA increased to $1,000,000 from breakeven in the prior year period, consistent with the increased revenue as well as a more profitable mix of products sold when compared to the prior year quarter.

Speaker 1

Turning to Slide 9. Our quarter end liquidity remains adequate with cash and availability under our credit facility of nearly 14,000,000 During Q3, we did see a significant increase in our net operating working capital of just over $7,000,000 due primarily to an increase in AR as we changed billing and collection terms with a major customer and because of the significant sales in September, the largest month of year to date. During the Q4, we expect operating working capital balances to decrease and as a result, we will be carrying lower debt. As a reminder, as I pointed out in the past few quarters, It should be noted that the AMP credits are not part of our traditional operating working capital calculation and we do expect this receivable balance to continue to At the end of the Q3, our AMP credit receivable totaled more than $11,000,000 representing credits earned under the IRA. We are currently evaluating the sale of these earned credits to unaffiliated institutional third parties, An approach, which if pursued, would accelerate monetization of these credits during 2024.

Speaker 1

Finally, as Eric mentioned, we are reaffirming our full year revenue and adjusted EBITDA guidance at this time, positioning us for a strong finish to the year. That concludes my remarks. I will turn the call back over to Eric to continue our discussion.

Speaker 2

Thanks, Tom. Allow me to provide some thoughts entering 2024. First, beginning with our Heavy Fabrication segment. In January 2023, you recall, we announced we'd entered into a supply agreement for wind tower purchases valued at approximately $175,000,000 with a leading global wind turbine manufacturer. Under the terms of the supply agreement, order fulfillment is to occur beginning in 2023 through year end 2024.

Speaker 2

In early November 2023, the parties discussed their joint intent shift approximately half the contracted tower section orders initially planned for 2024 into 2025, while maintaining the total number of tower sections stipulated under the supply agreement. Importantly, this shift will still allow us to support a ratable Base level of tower production into 2025. In our Gearing segment, efforts to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream going forward remain important for us and we've reorganized our commercial team to accelerate this transition. Additionally, in the latter part of Q3, we took actions to reduce overhead costs in response to the reduction in demand from the oil and gas market, while further leveraging our investments in automation made over the last several years. In Industrial Solutions, we continue to add process capabilities that equip to grow our share of wallet with existing accounts, while adding new ones.

Speaker 2

We've upgraded our in house engineering capabilities and plan to add plasma cutting and CNC machining over the Several months to continue our growth in power generation, renewables and other markets. I'm pleased that we booked more than $1,000,000 Wind and solar orders in this business through Q3 and have continued interest from the wind repowering market, which we anticipate will yield additional orders for for this division. In summary, I'm pleased with the strong operational performance from our team so far this year, including the good result we achieved in Q3. We continue to focus efforts to build a solid foundation for steady, profitable growth, serving the energy transition and other key markets and look forward to capitalizing on improved market demand in the years ahead. We will prudently maintain our facilities, equipment and control overhead costs while we invest in the vital core talent needed to grow our business as we leverage our presence in renewables, clean fuels and power generation, while establishing new footholds within other complementary markets such as Energy Transition.

Speaker 2

With that said, I will turn the call over to the moderator for the Q and A session.

Speaker 3

Thank you.

Operator

Our first question comes from Eric Stine with Craig Hallum. Please proceed with your question.

Speaker 4

Hi, Eric. Hi, Tom.

Speaker 2

Hi, Eric.

Speaker 4

Hey. Maybe if we could just start with the guidance. So just trying to figure out Or talk about what is implied from the or in the Q4. I mean, it's a pretty wide range. It would also seem to imply that you don't have a whole lot of wind activity given the EBITDA number that's implied.

Speaker 4

So maybe, I mean, it is a wide range. Could you just talk about what the factors would be to get you to the low end or the high end of that range and some things we should consider as we think about Q4?

Speaker 2

Yes. Well, I think, first of all, we tend to be conservative as management and we always be conservative as management. There's some trepidation with the oil and gas market As we have customers requesting for push outs, we're negotiating with those customers to include most of that in 2020 3 as we can. So that's the reason for a primary reason for our caution and reaffirming our guidance For 2023.

Speaker 4

And then is that fair to say though, I mean, given the EBITDA and I get it about being conservative, but given, I guess implying breakeven to positive $2,000,000 I mean that would seem to say that you have a lower Or much lower level of wind activity, tower activity in Q4. Is that the correct way to think about it?

Speaker 3

Well, it

Speaker 2

will be lower than Q3, because we finished we have multiple tower orders that we finished in Q3. There would be Lower activity in Q4 than in Q3, but not de minimis. So please take that as a conservative estimate.

Speaker 4

Okay. No, I guess, okay. Yes, that makes sense. Maybe then just turn into the decision with your Large customer to just kind of adjust the timing of the tower order. Curious,

Speaker 5

I mean,

Speaker 4

I know that was going to be recognized ratably 3rd quarter, 4th quarter and throughout 2024. I mean, is it as simple as Taking that what the quarterly run rate number would be and cutting it in half. And then also Now you would seem to have some open capacity in Abilene and given the that that's a very good location. And is there a possibility that you are able to fill some of that? Sure.

Speaker 2

I mean, while we while 50% Capacity utilization is preferred to 25% divided by 2 years. As an operator, 25% at least gives us that ratable volume, as we talked about before, Eric, across whole year and for 2025 as well. And you're correct, now that we have open capacity or more open capacity In that plant, we'll certainly market it to the other OEMs. Remember, there are 4 OEMs. This was one of the 4 and the other 3 Are still viable to get orders from for that same time period.

Speaker 2

So yes, our mission is, as it always has been, to fill that capacity.

Speaker 4

Got it. And last thing, just the commentary, I guess, Industrial Solutions, More positive than gearing. I mean, without kind of asking for a number, I mean, As you sit here today and some of the cost cuts that you've taken in gearing, I mean is that a potentially down year in 2024 And Industrial Solutions would potentially be flat to up?

Speaker 2

Yes, I would say that's a good estimate. Oil and I mean our gearing business is the most diverse, but it's full of industrial markets. And frankly, as interest rates continue to rise, The state continues to try to control inflation, it does and can have an impact on those industrial markets. On the other hand, Industrial Solutions, if you remember, is an international Company, we ship both domestically and internationally. So some of the domestic Drivers such as interest rates as inflation don't necessarily impact international.

Speaker 2

So I would say that would be a good estimate, Eric.

Speaker 4

Okay. Thank you.

Speaker 1

Thank you. Thanks, Eric.

Operator

Our next question comes from Amit Dayal with H. C. Wainwright. Please proceed with your question.

Speaker 3

Thank you. Good morning, everyone. Appreciate taking my questions. Eric, with respect to the pipeline In the different segments, could you give us some sense of what you are working with right now?

Speaker 2

Pipeline, if I start with Industrial Solutions, you're talking about pipeline of potential orders?

Speaker 3

Yes, yes. Sales pipeline, what you're seeing is there any large potential? I'm just trying to get a sense that you had this big order last year. Is there something Like that in this pipeline going forward.

Speaker 2

Okay. If you're talking about wind, I wasn't sure if you so. In terms of wind Wind

Speaker 3

or industrial yes, wind or industrial.

Speaker 2

Okay. Let me start with wind. Wind, it's as I've mentioned before, Notwithstanding large orders, which we had received and our competition had received, the general other OEMs Continue with their ratable PO to PO type of bids and orders and those continue. So I'd say the pipeline would be normal. There is a general, I'd say slowness in the market.

Speaker 2

As expected, we said that 2024 would be a transition year in 2025 and 2006 And beyond would be much stronger that so the Wood Mac and some of our exhibits indicate that. So that is as expected. We still believe The IRA is going to generate the long term exuberance in the wind market as anticipated. So There's your answer for that market for your wind market. For Industrial Solutions, which is the natural gas turbine market, That actually looks bullish.

Speaker 2

Natural gas turbine sales across the world this year, I think are the 2nd highest since we did the acquisition. So we do expect order flow from that business through the next year to 18 months. And within Gearing, as I mentioned, Gearing It is our most diverse business. They service industrial markets such as oil and gas, as I mentioned before, marine, steel, material handling. Those markets are subject to, I think, some interest rates dampening of demand, but yet we do have strong Order input in I'm sorry, quote input in our quote funnel, so we think we're going to win.

Speaker 2

So I'd expect A softer year in 2024 than 2023, but certainly not materially down at this point.

Speaker 3

Okay. All right. Thank you. And then from a raw material cost perspective, what are you seeing in terms of Potential increases on that front and impact from any of those types of increases on margins going forward?

Speaker 2

Remember, we're starting to see a bit of softening in steel, but it's still especially for plate steel, which is used in wind turbine towers, it's still At a multiyear high, but there's a bit of a softening, call it, between 5% 10% softening. So we think that could possibly help Profitability and the cost structure of wind turbine towers and wind turbines going forward? I think that's as far as overall inflation, we're seeing stable pricing. As a reminder also wind in the wind market, we are pass through with regard to our input costs, Primary input costs, so it wouldn't really impact our margins. It would impact our gross margins if steel goes up as we've talked before, Amit.

Speaker 1

Amit, the only thing I'll add to that is where we've been if go back a couple of years in 2020, the price of steel plate was A third to maybe a half of where it is today. So it's just for some perspective, we are still at these elevated levels of steel pricing.

Speaker 2

So So the headwinds that are I think are causing this what I'm calling a temporary move to the right with regard to wind turbines is Interest rates are definitely affecting financials for projects and Cost inputs, inflation, like Tom said, steel 2 or 3 times the price it was several years ago are definitely causing So the EPCs and the developers to seek higher PPAs, purchase price agreements or power purchase agreements from utilities to be able to enable their projects. So I think that is a short term dynamic that we're all facing in the market, which is causing things to move to the right a bit.

Speaker 3

Okay, understood. Thank you for that. And just the last one on monetizing these manufacturing credits. I mean, I know you said this is potentially something that will come into play in 2024, but is it going to come through with maybe one, I guess customer or party or are you talking to multiple parties about monetizing these credits?

Speaker 1

Yes. Thanks for the question. Yes, we've been talking to multiple parties about this and The structure changes depends on who you're talking to. There's a potential for one buyer to purchase all of them for This year and next year, there's potential for multiple buyers. So it kind of just depends on the deal that's out there.

Speaker 1

So But we are looking to monetize these as soon as possible, possibly 2023 if we can. We're just working towards that.

Speaker 3

Okay. That's all I have guys. Thank you so much.

Speaker 2

Thank you. Thanks, Matt.

Operator

Our next question comes from Martin Malloy with Johnson Rice. Please proceed with your question.

Speaker 6

Yes. First question, you mentioned a new product offering, low pressure for R and G Industry, could you maybe talk about that product and the scope there?

Speaker 2

Yes. We've developed Our proprietary products that service the natural gas virtual pipeline market and maybe you remember from previous calls, That market services, it replaces hard pipeline. So it takes stranded Natural gas compresses it, takes it to the point of use, whether it be a hospital, a different natural gas line if it needs to be maintained, A frac site and decompresses at the site, so it can be used at a normal pressure. So we developed technology To do that, so we first develop what we call the medium flow, which can handle call it maybe 2 trailers at a time decompressing, a high which we released earlier this year, which is up to 4 trailers at a time and this low flow, which is obviously a lower flow, lower need, lower demand, It's also the least expensive. So we think it can fit the price point that some of our customers are looking for.

Speaker 2

So it completes the suite Our products for this product family, we think we could serve the market very well with those three delineations. Also RNG, which is Renewable Natural Gas, That tends to be smaller in volume and so you don't need the higher pressure management as you would in our medium flow or high flow unit. That's why The renewable natural gas version is part of the low flow unit.

Speaker 6

Okay, Great. And just for a follow-up question, just wanted to ask about acquisition opportunities. And you've talked about in the past on calls. And Maybe could you give us a sense of kind of the pipeline that you're seeing right now and potential acquisition opportunities to look at?

Speaker 2

Well, we're cautious. We want to make sure we do the right acquisition, the right size acquisition. While we're looking at companies that are in the precision manufacturing space that either are or can certainly serve the energy transition, We're looking for additional and adjacent materials such as composites, lighter metals, aluminum. Everything we do basically right now It's carbon steel. We want to make sure we can get into more materials that service the clean energy transition such as lighter metals.

Speaker 2

But I don't have any specific ones or that I'm prepared to talk about right now.

Speaker 6

Understood. Thank you.

Speaker 2

Thanks, Marty.

Operator

Our next question is from Justin Clare with ROTH MKM. Please proceed with your question.

Speaker 5

Yes. Hi. Thanks for taking our questions. Hi, Justin. Hi, Justin.

Speaker 5

Hey, good morning. I wanted to ask about the capacity that's available at the Abilene facility here, Given the change to the long term agreements, so it looks like you have capacity that's at least part of your capacity is open for Q1 and Q2 2 of 2024. Just wanted to see, do you still have time to fill that capacity at this point? Or is it really Q3 and Q4 that you're going to be booking into, so trying to get a sense for what the utilization could be at that facility? And then Maybe if you could just comment on the demand in that region because it seems like it's been fairly strong recently.

Speaker 5

So maybe you can just speak to what you're seeing.

Speaker 2

Yes, I think you're right. And if we would take this 20% capacity utilization and spread that ratably over the year, that How quickly we could replace that capacity? I think as we talked before, 20 weeks In the short, maybe 26 weeks in the long term as far as lead time. So I think we'd be booking into the latter part of Q2, 34. But I do think we're going to see some demand in that market, especially towards the latter part of 20 24 for production in 2025.

Speaker 2

And just a reminder, what I said earlier, what we've seen recently and It's quite public. There's been a lot of announcements from certain EPCs and certain developers that Because of interest rates that are much higher now and some inflationary costs that are higher right now and some Supply chain delays, which frankly we haven't seen many of, but they have, it's causing them to ask for higher power purchase agreements from utilities because their projects are being squeezed from a financial return standpoint. We've also seen more interconnection delays Than we had thought we were going to see. But you're right, that Southern market, that Texas Oklahoma market IS still remains a strong market, notwithstanding some of these interconnection delays in the interest and inflation Aspects that I mentioned, we still believe that the long term impact of the IRA is going to be felt, in kind of post 2024 And that's a hot market literally for wind. And I think it will remain that way in the future.

Speaker 5

Got it. Okay, that's really helpful. And then just shifting to the Manitowoc facility, can you comment on If you've seen any meaningful shift in demand at that facility, even looking into 2025, How are our customers Yes. What I've

Speaker 2

seen is, as I mentioned, I thought things were kind of tend To move from the south to the north, that tends to be typical. There's a pendulum swing that seems to go north to south depending on State's appetite for supporting renewables or whatnot, I think it is starting to move north. We have seen several, What I would call meaningful inquiries for that capacity, the Northern capacity that Northern plant, Justin For I would call late 3rd, Q4 2024. So it's coming back. Activity quoting activity interest is increasing, but I certainly don't have any orders to report at this time.

Speaker 5

Got it. Okay. And then maybe just one more here. You mentioned in the prepared remarks, AR had ticked up here in Q3. It sounds like there was a change in the terms with a particular customer.

Speaker 5

Can you talk about what that what the change might have been there? And then Should we be anticipating AR moving lower in Q4 as you collect on some of the receivables generated in Q3?

Speaker 1

Yes. As I said in the prepared remarks, I think we have an expectation in Q4 that our operating working capital will decrease. I think that's we could just leave it at that. I think that's we don't think there's anything else meaningful there.

Speaker 5

Got it. Okay. Thank you.

Speaker 3

I'll pass it on.

Speaker 1

Thanks, Justin. Thanks, Justin.

Operator

We have reached the end of the question and answer session. I would now like to turn the call back to Eric Blaschard for closing comments.

Speaker 2

Well, thanks everyone for joining. We appreciate your interest and look forward to coming back to you after Q4 to talk about our Q4 results. Have a great day everyone.

Operator

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.

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