Broadwind Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to Broadwind's First 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 Ciccone. Thank you. You may begin.

Speaker 1

Good morning, and welcome to the Broadwind First 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 Q1 results. I would like to remind you that management's commentary 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 and the press release issued today. I would like to inform you that Broadwind filed its definitive proxy statement and related proxy materials With the SEC in connection with the 2023 Annual Meeting of Stockholders and in connection therewith, Its directors and certain of its executive officers are participants in the solicitation of proxies from our stockholders in connection with such annual meeting. Stockholders abroad are strongly encouraged to read such proxy statement and all other related materials filed with the SEC carefully and in their entirety when they become available as they will contain important information about the 2023 Annual Meeting, including the identity of the participants in the solicitation and their direct or indirect interests by security holdings or otherwise. At this time, we will make no further comment on the nominations made by WM Argyle Fund or any matters or discussions related to WMR Guile Fund or its nominations.

Speaker 1

At the conclusion of our prepared remarks, we will open the line for questions. With that, I'll turn the

Speaker 2

call over to Eric. Thanks, Tom, and welcome to those joining us today. Our first quarter results demonstrate a strong start to the year as sustained demand across diverse end markets, Improved margin realization and consistent operational execution contributed to significant year over year growth and profitability. The green shoots first evidenced as we exited last year continued into the Q1 As indications of interest from OEM customers, together with continued stability across our diverse non wind markets, Have contributed to improved visibility and optimism across our business in 2023 and into 2024. We've recently announced several significant new business wins, including the $175,000,000 in new tower orders, followed by a record $8,000,000 order for our proprietary mobile pressure reduction systems or PRSs And related accessories in April.

Speaker 2

These orders reflect positive business momentum within our legacy Wynn business, together with significant traction within new higher margin adjacent markets that leverage the unique intellectual property we are developing here at Broadwind. Importantly, this performance reflects meaningful progress on our strategic plan, which emphasizes profitable growth Across a broader spectrum of energy transition and clean tech opportunities. As we further expand our product and service capabilities, We expect to drive improved asset utilization and unit economics consistent with our focus on driving improved margin realization through the cycle. We booked $40,000,000 in orders in the Q1, down about 25% from the prior year quarter as expected, Given the pull forward of the large multiyear tower order we received in December 2022, the timing of these tower orders was partially offset by a more than 100% increase in our industrial fabrications orders, which include our proprietary PRS product line. Entering the Q2, we continue to operate on plan both at a commercial and an operational level.

Speaker 2

Commercially, we are staying disciplined on price as we pass along inflationary cost increases to our customers. We are also negotiating improved contract terms and prudently managing our cash and liquidity to ensure adequate working capital availability as we grow. We're also focusing on expanding our product mix within higher margin or profitable adjacent markets as reflected by our recent PRS product launches. Operationally, we continue to deploy lean operating principles across the organization, including continuous improvement projects across all divisions with an emphasis on improved asset utilization. We've continued to focus increasingly on plant and process automation, positioning us to capture improved manufacturing efficiencies.

Speaker 2

This year, we've led a major retooling and automation of our coatings process at the Abilene plant, which is expected to be fully operational at the end of May 2023. We generated revenue of $49,000,000 in the Q1, a year over year increase of 17% with each reporting segment posting double digit gains. We generated $4,100,000 of adjusted EBITDA in the quarter, an increase of more than $4,000,000 versus the prior year period, resulting in a return to profitability in the period. Our Heavy Fabrication segment booked Q1 orders of $20,000,000 down 41% year over year as expected. Given that we received the $175,000,000 multiyear tower order late last year, we're pleased to Increasing strength in our Industrial Fabrications product line with orders more than doubling year over year.

Speaker 2

Our Gearing orders were $12,000,000 down 12% year over year, led by softening of incoming oil and gas orders, partially offset by increases in orders The Industrial and Steel Processing sectors. Orders for Industrial Solutions of $7,000,000 continue to be strong, posting a 56% increase year over year led by orders for both new gas turbine builds as well as the gas turbine aftermarket. Our total backlog at the end of Q1 was $288,000,000 a 146% increase versus the prior year period. Quoting activity in our non wind markets remain strong and we expect good order flow to continue through the balance of this year. Within our Heavy Fabrications segment, Q1 revenue was $32,000,000 a 16% increase year over year with wind towers and other industrial fabrications posting gains of 12% 31%, respectively.

Speaker 2

Importantly, our new proprietary product line, the Broadwind Pressure Reducing System or PRS, which is a vital part of the natural gas virtual pipeline system in North America continues to perform well with revenues up 65% year over year as we execute our strategy to expand in clean fuels. Gearing revenue was $12,000,000 a 13% increase year over As customer activity continues to be strong within both the energy and industrial sectors, we are seeing the positive impact of our commercial strategy given 165% year over year growth in our Industrial segment this quarter. In summary, I'm pleased with the operating performance of all divisions entering the year as we continue to execute our growth and diversification strategy. With that, I'll turn the call back over to Tom for a discussion of our Q1 performance.

Speaker 1

Thank you, Eric. Turning to Slide 5 for an overview of our Q1 results. We had a strong first quarter performance with consolidated revenues of $48,900,000 compared to $41,800,000 in the prior year quarter. The 17% increase was primarily reflective of the sustained demand strength and strong operational execution across our diverse end markets. Each of our operating segments generated year over year growth in both revenues and operating income.

Speaker 1

In Q1, we recognized $4,100,000 of EBITDA compared to breakeven EBITDA in the prior year Q1. Our strong EBITDA performance and improved margin realization is primarily attributable to the higher overall volume level And the benefits attributable to the Advanced Manufacturing Production Tax Credits or A and P credits. We are in this quarter associated with our wind tower production. The AMP credits were introduced as part of the Inflation Reduction Act, which was enacted into law in 2022. The IRA provides for manufacturing tax credits associated with eligible wind and solar components.

Speaker 1

Manufacturers qualify for these credits based on the electricity output for each component Produced and sold in the U. S. Starting in 2023. It is also important to point out that we generate GAAP net income of 800,000 or $0.04 per diluted share in the Q1. After adjusting for the $700,000 of proxy contest related costs, We generated $1,500,000 of net income or $0.07 per diluted share.

Speaker 1

Turning to Slide 6 for a discussion of our Heavy Fabrication segment. 1st quarter orders were comparatively limited at $20,200,000 a decrease from the prior year period and sequentially. This decrease is attributable to the timing of the large multi year $175,000,000 tower order that was received late in 2022. Based on the timing of this order and the resulting near record backlog that we've Since year end, we expect the orders to be limited when compared to prior periods where order intake levels reflected a more consistent project by project timing. 1st quarter revenues were $31,600,000 up from $27,300,000 in the prior year quarter.

Speaker 1

Although we sold less tower sections versus the prior year period, we realized an increase in wind tower revenue as we had less customer supply material and increased steel costs, which is generally a pass through to customers. In addition, we recognize a 31 increase in Industrial Fabrication product line revenue due to increased demand for mining customers as well as for our PRIS units in the current year quarter. During the Q1, we recognized EBITDA of $3,900,000 an improvement of $3,300,000 versus the prior year period, primarily driven by the AMP credits recognized in the current year period as well as the increased industrial fabrication product line revenue. Turning to Slide 7. Gearing orders continue to be strong in Q1, totaling $12,400,000 This represents a decrease versus the prior year Q1, but remains on pace with a $13,000,000 quarterly average experienced during 2022.

Speaker 1

Backlog increased again in Q1 and the resulting balance represents the highest reported level in recent history. Compared to the prior year Q1, segment revenues increased 13% to 12,000,000 reflective of the comparatively stronger backlog that we entered 2023 with. We generated $1,300,000 of segment EBITDA in Q1, An increase of $800,000 versus the prior year quarter, a result of the additional revenue, a more profitable mix of products sold and the lack of ramp up costs incurred in the prior year. Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions recorded $7,000,000 of new orders in Q1.

Speaker 1

This represents a $2,500,000 or 56% increase versus the prior year Q1. We ended the Q1 with a record high $17,000,000 in backlog as we continue to see strong demand for our core Natural Gas Turbine Offerings. 1st quarter segment revenues increased to $5,400,000 from $4,100,000 in the prior year period, due primarily to the strong order intake levels we've been experiencing and a large shipment for an international customer. EBITDA increased to $800,000 consistent with the increased revenue as well as an improved mix of products sold when compared to the prior year quarter. Turning to slide 9.

Speaker 1

Our quarter end liquidity remains adequate with cash and availability under our credit facility of $12,300,000 As noted during the Q4 results conference call, we expect that our operating working capital to increase in Q1 as a result of higher AR and inventory balances consistent with the increased production levels as well as deposit balances decreasing to our new normalized operating levels. As such, we saw operating working capital increase sequentially, which was funded by our line of credit. We don't anticipate any further significant increases in operating working capital for the balance of the year. It should be noted that the AMP credits are not part of our traditional operating working capital calculation, but we do expect this receivable Balance to increase during the year. Finally, as we announced on April 20th, we are affirming our full year financial guidance.

Speaker 1

For the full year 2023, we currently anticipate total revenue to be within a range of $205,000,000 $220,000,000 And adjusted EBITDA to be approximately $16,000,000 to $18,000,000 That concludes my remarks. I will turn the call back over to Eric for an overview of end markets in addition to some concluding remarks. Thanks, Tom.

Speaker 2

In the near to medium term, we continue to view the Inflation Reduction Act of 2022 as a significant positive catalyst for the wind sector as it provides the long term policy certainty long awaited by developers. We believe that the IRA supported by rising commercial and industrial demand We'll support ratable growth in new wind installations beginning in 2024. Even as we await final IRS guidance, We are seeing renewed confidence in our wind customers, given expectations for a more stable industry growth over the next decade. The AMP credits included in the IRA create a new production credit for domestic manufacturers of the components relating to clean energy, including our wind tower products. As we look forward to the balance of 2023 and into the next year, We have increased visibility and strengthened backlog in each of our operating segments.

Speaker 2

As we build on our legacy in wind to expand into new adjacent cleantech markets such as clean fuels, solar and power and infrastructure. As mentioned earlier, in our Heavy Fabrication segment, we are adding coatings automation to improve our plant throughput, optimize labor and reduce costs as we continue to work with our customers to book capacity for towers and other industrial fabrications for 2023 and beyond. The line of proprietary pressure reducing systems introduced last year is progressing as per our strategy, and we're pleased with the favorable market response And order activity we've received for the new Hi Flo model released this year. We've also introduced a rental option for these units in response to customer demand. Given our current capacity, we expect to generate approximately $20,000,000 in annual Incremental revenue from this product line by 2025 at attractive margins.

Speaker 2

In our Gearing segment, We are seeing success with our efforts to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream going forward. Order growth from Industrial and Steel Processing segments has been strong and we're seeing good response to our increased focus on gearbox repair and refurbishment services. And finally, our strategy to add process capabilities to our Industrial Solutions business To expand our share of wallet within existing accounts, while penetrating new ones and improve margin profiles is yielding desired results. In summary, I'm pleased with the progress our team is making to build a durable foundation for steady profitable growth and look forward to capitalizing on improved market demand in the years ahead. As wind and renewables investment activity gradually increases over the next Several years, our strategy to prudently maintain our facilities, equipment and vital core talent positions us well to support an ongoing recovery in order We will leverage the presence we have established within wind, clean fuels and power generation, while establishing footholds within other complementary market adjacencies such as solar.

Speaker 2

Concurrently, we will drive capacity utilization, Margin expansion and reduced net leverage ensuring continued balance sheet optionality to support the long term growth of our business. With the successful execution of our strategy, we expect to generate significant growth in both revenue and income Over the next several years, as we more fully leverage our NOLs, with emphasis on long term value creation. With that said, I will turn the call over to the moderator for the Q and A session. Thank you.

Operator

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

Speaker 3

So curious, if you could talk a little bit about the large wind contract, presumably the business that you did In Q1, is really business secured in mid-twenty 2 or potentially even early 2022. So I just want to confirm that, but then also just think about any more clarity as the year progresses on when you Expect that large contract to start up and when it does, is it still the view that it would be ratable through the end of 2024?

Speaker 2

Yes. On orders against that particular larger order will begin producing In Q3 and they'll last all the way through the end of 2024. Gradually to your point, yes.

Speaker 3

Got it. And then you talked I guess in the past you've got into the forward quarter. And I know that you've talked about having better visibility, better than you've ever had. Just curious,

Speaker 2

Any color you can provide on Q2 and

Speaker 3

maybe just linearity versus Q1? And Also, any chance you can talk about the mix of wins since that's obviously going to dictate The credit that you would recognize in the quarter?

Speaker 2

I think for Q2, we're going to see consistent with Q1 the mix To make sure also be consistent, we were able to pull a little bit of towers into Q1. This robot, this coatings automation that we are putting in this year, we elected to put that in Q2 instead of Q1. So pull some orders into Q1. But I do expect it to be consistent with Q1.

Speaker 3

Okay. With a little less wind, just to be clear.

Speaker 2

Little less when, yes.

Speaker 3

Okay. All right. No, it's fair. I appreciate that.

Speaker 1

And then maybe

Speaker 3

just sticking with wind, it sounds like in your commentary, you're talking about 24 in terms of maybe an uptick in orders there. I mean, so does that kind of It implies that for the Manitowoc facility that it's still early in the wind recovery that that's Kind of the timeframe when you might expect some orders that would fill up that facility?

Speaker 2

Yes, I would say we're I would call it the early innings. As I mentioned before in previous calls, the South has been hotter than the North and the North is starting to heat up, but it will take some time. So I think you're correct. And in 2024, we'll start seeing some orders consistent with the overall growth and installation expectations of the wind market.

Speaker 3

Yes. No, understood. Great color. I guess, Maybe just last one for me, just for Tom on working capital. Given Kind of what you're talking about in terms of free cash flow and $6,000,000 of CapEx for the year implies That not only does it stay flattish or that you actually start to get working capital benefit As the year progresses, so I mean any color you can provide in terms of how that might hit throughout the year?

Speaker 1

Yes. No, I think we've seen the significant increase in working capital that we projected, kind of plateau now at the end of Q1. So I don't Expect a lot of significant movement for the balance of the year. There may be some ebb and flows within the quarters, but I think it will be pretty stable Throughout the balance of the year, I think the balance of our free cash flow will come from our earnings. So there might be some small benefit to Working capital, but I think it's mostly on the cash that we'll generate.

Speaker 3

Okay. All right. Thanks for the color.

Speaker 1

Thanks, Eric. Thanks, Eric.

Operator

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

Speaker 4

Good morning. Thanks for taking our questions.

Speaker 2

Hey, Justin. Good morning.

Operator

So just to start off here,

Speaker 4

on the manufacturing credits, it looks like you secured just over $3,000,000 in the Advanced Manufacturing Credits in Q1. I know we're still waiting on treasury guidance there, but I was wondering if you could just talk about How you might monetize the credits? Are you looking at transferring those credits near term? Or is it more likely So that you would receive the cash in 2024. And then maybe if you could just talk more broadly about Where you might need more clarity from the treasury on those manufacturing credits?

Speaker 1

Yes. Thanks, Justin. So at this point, if we do nothing, we won't be able to monetize those until 2024 When we file our year end tax return for 2023. So, we've talked to several people about the potential monetization of these credits. There's just an unwillingness to do anything until the IRS comes out with their guidance regarding this.

Speaker 1

We don't know what it's going to look like, With the transfer, if there's some certificate that's issued. So, everyone's kind of in a waiting game to see when that comes out. But This is a long term credit, so the market is going to be patient and we'll be transferring, but we think this market will develop over time.

Speaker 3

As far as the clarity, Justin, yes, Justin,

Speaker 2

this is Eric. To add on the clarity that we expect from the IRS guidance, I don't expect much change And what's specific to the component manufacturers, but there is this question about domestic content, some labor contributions that I think Overall, it could impact developers and I think that's what's causing a bit of a pause.

Speaker 4

Okay. Got it. Yes. So Maybe

Speaker 3

you could speak to that

Speaker 4

a little bit more. We are waiting on domestic content and the manufacturing credits in terms of the guidance from the treasury. Is that having a meaningful impact on your customers and developers? And are we seeing developers maybe Put a pause on projects until there is more clarity.

Speaker 2

Yes, I think the answer is a little of both. I mean, the market is seeing increased activity, as evidenced by some of the orders announced by us and by others. But I do believe there's still some hesitancy as we await the final guidance. Justin, there may be projects that are just kind of on the bubble, if you will, and this guidance Might help justify a little bit more than others. So I think it's the answer is a little bit of both.

Speaker 2

We're definitely seeing some exuberance in the market, There could be some pause, some waiting.

Speaker 4

Got you. Okay. And then I know you've spoken a good amount about Cash flow through the year and your working capital here, but just wanted to ask, is there potential that you may need to Build inventory as we move through the end of this year here in anticipation of Pickup in early 2024, what kind of visibility do you have right now into potentially increasing utilization in the Early part of the year in 2024 or is it more likely that we see a greater ramp Later in 2024 and into 2025?

Speaker 1

I think the latter. I think we're not Inventory will ebb and flow. Again, our working capital will ebb and flow, but We just don't think it's going to be a significant factor for the balance of this year at least. That may be more of a factor towards the end of 2024, I would think.

Speaker 4

Okay, great. All that for me. Thank you.

Speaker 2

Thanks, Justin.

Operator

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

Speaker 5

Thank you. Good morning, guys. Good to see the execution of the company.

Speaker 1

Good morning, Matt.

Speaker 5

Hi. So just on the credit topic, right? Are you expecting to accumulate these credits at a similar run rate that you saw in the Q1 for the remainder of the year?

Speaker 2

I would say, yes, they're ratable. They do as a reminder, they're calculated based on the capacity factor Of the turbines we're building for, but there is a range that we think we're going to be building within. So I think, yes, Given that range, it should be ratable for the rest of the year.

Speaker 1

Amit, the only thing I would add to that is that some of this some of the tower designs that we're producing, we won't know about right away. They are subject to the megawatt rating of the tower that we're designing as well as whether they're 3 or 4 section towers. So There is some uncertainty going forward regarding those.

Speaker 5

Understood, understood. That's fair. And then You guys came in a little bit stronger on the gross margin front relative to our expectations. I'm just wondering if There is room for further upside on the gross margin side given the new product mix, or is this the level at which you probably will be for the rest of the year?

Speaker 2

Well, I think we saw a little bit of enhanced capacity utilization because we were able to pull orders And into the quarter through good execution, but I think from a gross margin standpoint, it would be relatively stable for the rest of the year. Okay. Thank

Speaker 5

you. And then just last one for me on the $8,000,000 PRS order. Could you talk a little bit about what type of customers you cater to with this offering? And what the opportunity looks like for you?

Speaker 2

Yes. Those Units go into what we call the virtual pipeline, which is the process of taking Fuel gas, natural gas from its point of origin source compressing it and then taking it to a point of use where it's where it would be not subject to pipeline service And then decompressing on the other end and that's and we support the equipment for the decompression or the pressure reduction At the end, so we are selling these things to purveyors of natural gas. They tend to be working of the gas at the point of use and they use our equipment to do that.

Speaker 5

Okay, understood. Yes, that's all I have guys. I will follow-up with you later on. Thank you.

Operator

Sure. Thanks Amit. We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Speaker 2

Yes. Thank you. We appreciate your interest in Broadwind. We're excited for the way our year started and we look forward to coming back to you after Q2 So give a report then. Thanks everyone.

Operator

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

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