Broadwind Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 14, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to Broadwind Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A question As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Giacconi. Thank you.

Operator

You may begin.

Speaker 1

Good morning, and welcome to the Broadwind Second Quarter 2023 Results Conference Call. Leading the call today is our CEO, Eric Blashford Dom Tom Ciccone, the company's Vice President and Chief Financial Officer. We issued a press release before the market opened today detailing our Q2 results. I would like to remind you that management's commentary Results 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. 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. During the Q2, we continued to demonstrate strong execution on our strategic plan, while capitalizing on balanced demand strength comes from the line of David. At the same time, we delivered sustained price discipline, drove efficient materials procurement I reduced our freight expense and introduced process enhancements, which together with the benefits of the IRA related tax benefits translated to significant year over year margin expansion and improved profitability in the period. This strong performance was partially offset by planned maintenance at our Abilene manufacturing facility, where we are retooling and automating portions of our coating system. The planned maintenance at Abilene resulted in an EBITDA impact of approximately $600,000 in the 2nd quarter or $0.03 on an earnings per share basis.

Speaker 2

Indications of interest from our OEM customers, together with continued stability across our diverse non wind markets, Have contributed to improved stability and optimism across our business as we look to the second half of the year, leading us to increase our adjusted EBITDA guidance for the full year 2023. Positive momentum within our legacy wind business Together with traction within new higher margin adjacent markets that leverage the unique intellectual property we're developing here at Broadwind reflect meaningful progress on a strategic plan, one that emphasizes profitable growth across a broader spectrum of energy transition and Cleantech 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 $25,000,000 in orders in the 2nd quarter, down about 3% from the prior year quarter A softness in gearing orders from the oil and gas market were mostly offset by increases in Industrial Fabrications orders for the Mining segment, Orders for our proprietary natural gas producing systems pressure reducing systems or PRS and orders for the natural gas turbine aftermarket. Entering the Q3, we continue to operate on plan, Both at a commercial and operational level.

Speaker 2

We're focused on expanding our product mix within higher margin adjacent markets As reflected by our latest expansion of the PRS line, the H250 high flow unit. We've introduced new technical advisory sessions for our Gearbox customers and new preventative maintenance service offerings for our PRS customers. Both programs designed to increase the overall value provided to our customers. Operationally, We've deployed lean operating principles across the organization, including continuous improvement projects across all divisions with an emphasis on improved asset utilization. Our consistent focus on team member safety, quality systems and workforce training has allowed us to continually meet the strict quality and delivery requirements so vital to our customers.

Speaker 2

The coating system retool and automation project launched in Abilene in Q2 will wrap up later this quarter and we're looking forward to reaping the benefits of this $1,500,000 investment in terms of both throughput and labor optimization. We generated total revenue of $51,000,000 in the 2nd quarter. A slight reduction in tower revenue resulting from the planned maintenance in Abilene was offset by increases in all other product lines. We generated $5,400,000 of adjusted EBITDA in the quarter, an increase of almost $5,000,000 versus the prior year period, improving upon a strong performance in Q1. The combination of improved EBITDA generation, together with continued working capital efficiency, contributed to strong year over year growth in cash flow in the period.

Speaker 2

Our Heavy Fabrication segment booked $12,000,000 of orders in Q2, down 5% year over year as expected. We're pleased to see increasing strength in our Industrial Fabrications Product line with orders up 12% year over year led by PRS sales. Gearing orders were $6,000,000 down 35% year over year, driven by a softening of incoming oil and gas orders, is now open. Partially offset by increases in orders from the steel processing sector. Orders for Industrial Solutions of $7,000,000 continue to be strong, posting a 75% increase year over year led by orders for both the natural gas turbine aftermarket and Our total consolidated backlog at the end of Q2 was $262,000,000 is up $169,000,000 versus the prior year period.

Speaker 2

Coating activity in our non wind markets remain strong and we expect good order flow to continue through the balance of the year, notwithstanding the softness in gearing orders for the oil and gas market. Within our Heavy Fabrications segment, Q2 revenue was $34,000,000 a 5% decrease year over year With Industrial Fabrications revenue partially offsetting the reduction in towers revenue resulting from the previously mentioned maintenance activity in our Texas plant. Hearing revenue was $11,000,000 a 9% increase year over year as customer activity continues to be strong within both the industrial and steel sectors, up 166% 52% year over year respectively. Industrial Solutions revenue was up 24% year over year, led by increases in both new gas turbine and aftermarket In summary, I'm pleased with the operating performance of all divisions through the first half of the year and look forward to building on this momentum in the back half of 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 Q2 financial performance.

Speaker 1

Thank you, Eric. Turning to Slide 5 for an overview of our 2nd quarter performance. We had a strong second quarter, 1 highlighted by significant margin expansion and growth in adjusted EBITDA. In Q2, we recognized $5,400,000 of EBITDA compared to $400,000 in the prior year Q2. The $5,000,000 increase and improved margin realization is due primarily to the benefits attributable to the advanced manufacturing production tax credits or A and P credits we earned this quarter associated with our wind tower production together with solid overall operational execution.

Speaker 1

We generated net income of 1,400,000 or $0.07 per diluted share in the 2nd quarter. After adjusting for over $1,000,000 of proxy contest related costs incurred in the 2nd quarter, We generated $2,400,000 of net income or $0.11 per diluted share. Turning to Slide 6 for a discussion of our Heavy Fabrication segment. 2nd quarter orders were $12,400,000 a decrease of $600,000 from the prior year period. As I stated last quarter, based on the timing of the large multi year tower order that was received late in 2022, We expect tower orders to be limited when compared to prior periods when orders were placed in more regular intervals.

Speaker 1

The Q2 orders did include over $8,000,000 related to our proprietary mobile PRS units, a record for that product line. These orders included both our medium flow and newly introduced high flow PRS model. 2nd quarter revenues were $33,900,000 up sequentially, but down 1.6 versus the prior year quarter. We recognized less tower sections in the current year quarter, primarily due to the planned maintenance in our Abilene manufacturing facility. Partially offsetting the impact of lower tower sales was an increase in industrial fabrication revenue, reflective of higher demand for our PRS product offerings.

Speaker 1

During the Q2, we recognized segment EBITDA of $5,000,000 an improvement of $3,800,000 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 slowed in Q2, totaling 5,800,000 A 3,100,000 or 35 percent decrease versus the prior year quarter. The majority of the decrease was attributable to the slowdown in oil and gas orders. Segment revenue was $11,000,000 up $900,000 compared to the prior year Q2, reflective of the strong backlog with which we entered the year.

Speaker 1

We generated $1,000,000 of segment EBITDA in Q2, an increase of $900,000 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 continues to operate in a robust demand environment. We recorded $7,200,000 of new orders in Q2, the 2nd highest quarterly intake level since Broadwind's acquisition of Red Wolf in early 2017. The $7,200,000 represented 3,100,000 or 75% increase versus the prior year period.

Speaker 1

We ended the 2nd quarter with a record high $18,000,000 in backlog as point $3,000,000 from $5,000,000 in the prior year period due primarily to the strong order intake levels we've been experiencing. EBITDA increased by $800,000 to $1,000,000 consistent with the increased revenues as well as an improved mix of products sold Turning to Slide 9. Our quarter end liquidity remains adequate With cash and availability under our credit facility of $15,200,000 a $2,900,000 sequential improvement. After the large expected Q1 operating working capital increase, working capital has since decreased by approximately $8,000,000 is part of our traditional operating working capital calculation, but we do expect this receivable balance to increase during the year. For the balance of the year, we do intend to reduce our operating working capital balance and lower debt.

Speaker 1

Finally, As Eric mentioned, we are increasing our full year EBITDA guidance. For the full year 2023, we currently anticipate total adjusted EBITDA to will be approximately $17,000,000 to $19,000,000 This is up from the $16,000,000 to $18,000,000 range previously announced. We are not changing our existing revenue guidance, so that remains at the $205,000,000 to $220,000,000 range. That concludes my remarks. I will turn the call back over to Eric to continue our discussion.

Speaker 2

Thanks, Tom. Looking ahead, the IRA related tax benefits remain a significant catalyst for new wind investment over the coming 24 months. Our wind backlog has grown substantially since its passage. Customer interest remains strong and the market remains active, Reinforcing our view that wind is positioned for a sustained period of expansion. As we look forward to the second half of twenty twenty three And into next year, we have increased visibility and an improved backlog in each of our operating segments.

Speaker 2

As we build on our legacy in wind to expand into new adjacent markets in cleantech, We continue to evaluate a number of inorganic growth opportunities that could accelerate our entrance into these and other complementary high value markets. As mentioned earlier, in our Heavy Fabrication segment, we have added coatings automation to improve our plant throughput and leverage labor As we work with our customers to prepare for the expected years long increase in demand. The line of proprietary natural gas pressure reducing systems introduced last year is progressing as per our strategy. We've released our second model in that product family, the H250 high flow unit, And we're pleased with the order activity we've received for that model so far. We have also introduced rental options and preventative maintenance programs for this product line in response to customer demand.

Speaker 2

Given our current capacity, we expect is to generate approximately $20,000,000 in annual incremental revenue from these products by 2025 at attractive margins. 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 expanded our technical sales team to improve our response time. Order growth from the Industrial and Steel Processing segments has been strong and we're seeing increased interest in our quick turn, And finally, our strategy to add process capabilities to our Industrial Solutions business to expand our position within existing accounts, while winning new ones and improve margins is yielding desired results. I'm pleased that we booked more than $1,000,000 of wind and solar orders in this business this year as we increase our presence in renewables markets. In summary, I'm pleased with the progress our team is making to build a durable 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.

Speaker 2

As wind and renewables investment activity gradually increases over the next several years, We will prudently maintain our facilities, our equipment and invest in the vital core talent we need to support an ongoing recovery in order activity. We will leverage our presence in wind, clean fuels and power generation, while establishing new footholds within other complementary markets, will be answered in the energy transition. Concurrently, we will drive capacity utilization, margin expansion and reduce net leverage, ensuring continued balance sheet optionality to support the long term growth of our business. As we successfully execute this 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 an emphasis on long term value creation. With that said, I'll turn the call over to the moderator for the Q and A session.

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question comes from Eric Stine with Craig Hallum. Please proceed with your question.

Speaker 3

Hi, Eric. Hi, Tom. Abilene, filled to a large extent makes sense given its location. I'm just curious, could you talk a little bit about the question plant, I mean, what do you feel like you need to see in the industry to start to gain confidence in timing? I mean, obviously, that will be filled at some point, is it activity picking up in the Midwest in wind markets that are closer?

Speaker 3

Is it waiting for other plants industry wide to fill up that might be in more advantageous locations or how should we think about that?

Speaker 2

Yes, I think certainly, we see about 44 megawatts or 44,000 megawatts or 44 gigawatts Of demand in the northern region, we do see it in kind of the central northern region, kind of the Dakotas And west of there, so we would need to see some of that demand materialize. Again, there's plenty of demand there In the eastern part of that region, we do expect that to happen. What's encouraging to me is that 44 gigawatts is a lot of demand and this is in terms of announced advanced development, even some delayed projects. This does not really include what's already under construction. So the demand is there.

Speaker 2

But you're right, we would need to start seeing some of that demand materialize In the northern and the easternmost part of that region, meaning Minnesota, Iowa, the Dakotas Versus Wyoming, Montana and further west.

Speaker 3

Got it. And then in terms of just other I mean, other plants is that so it really is more just activity and starting up closer to Manitowoc rather Just capacity being filled industry wide in other locations.

Speaker 2

Correct. I mean, we are on the eastern side of that, Eric. So we've got some competitors that are more West. And so you're correct, as they fill up and their demand Those Western, then we would fill up.

Speaker 3

Got it.

Speaker 2

Again, out of the plan in Minnesota and Iowa, etcetera.

Speaker 3

All right. That is helpful. Thanks for that. And then maybe just turning to the guide on EBITDA. I know that Abilene, just the work there, you're obviously setting up for the back half and into 2024 and it limited Q2.

Speaker 3

But the EBITDA guide does imply that it would be down potentially sequentially Or down from Q2, and I'm just trying to make sense of that given if you're going to be heavier on the wind side, you get more of the AMP. Just thoughts on that. Are there other parts of the business, whether it's mix or something else that may limit EBITDA in the back half?

Speaker 1

Yes. Eric, thanks for the question. I think a lot of it has to do with the fact that we executed very, very well in Q1 and Q2. As you mentioned, the mix was very favorable, in Q1, Q2, and some of that will turn around, in the latter half of the year.

Speaker 3

Got it. Okay. So but wind, obviously, I mean, that's that will Strengthen it's simply mix in other parts of the business?

Speaker 2

Correct. Yes.

Speaker 3

Okay. And then maybe last one for me just on Kind of thinking about 3Q, 4Q, as you see the order book and the timing, I mean, do you is it How should we think about these? Are they at this point similar looking quarters? Or do you envision 1 quarter higher than the other?

Speaker 2

From the order book, I would say it's consistent from the year on out. Tower orders, as you know, Eric, have been traditionally spiky and we won this really nice order Late last year, so we do expect order activity to continue. I don't see a number of very, very large ones Over the next 6 months or so, but I do see strong order flow in the other businesses, Industrial Fabrications, Industrial Solutions and to a lesser extent, gearing for the rest of the year.

Speaker 3

Okay. And then from a revenue, I guess just a revenue, linearity of revenue for the back half of the year. I mean, is it fair to say that right now, I mean, they look like pretty similar quarters or is At least at this point, it looks like it might be higher.

Speaker 2

Yes. I would say, we've got tower projects in both of our plants. The one in the northern plant, A lot of that will shift. Some of most of it will shift in Q3. So Q3 will be a stronger quarter than Q4, but the latter half of the year will be balanced other than that.

Speaker 3

Okay. Thank you very much.

Speaker 2

Thanks, Eric. Thanks, Eric.

Operator

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

Speaker 4

Thank you. Good morning, guys.

Speaker 2

Hi, Amit. Good morning.

Speaker 4

Just following up on Eric's question in your answer, last question in your answer to that. In terms of the backlog, you had this big win late last year. So it looks like there's nothing significant that may be coming up that may be of that size this year, but the pipeline going into next year, are there deals of that size or similar sort of bigger or smaller, I guess, that could materialize for you and help maybe ramp utilization even better?

Speaker 2

Sure. There are always larger deals that are percolating. I do expect some maybe smaller deals to materialize over the next couple of quarters for smaller project for smaller tower deals And perhaps larger ones into 2024 potentially late 2023 into 2024.

Speaker 4

Okay. And with the visibility that you have right now, will that say by the end of 2020 Will you potentially be at full capacity levels? And then how do we plan for growth ahead of that?

Speaker 2

This is to Eric's question. It has to full capacity, especially in the Northern plant has to do with this It's about 44 gigawatts of data coming of tower demand coming online, turbine demand coming online. The timing of that is slower than the timing in the southern part of The wind belt. So I would say, over the next couple of quarters, we should see that demand increasing. As far as full capability capacity in the Northern Plant, I would not look to that until perhaps into 2025.

Speaker 4

Okay. Thank you for that. Maybe just last one from me guys. The strength in the non wind business, is this just being driven by like sort of a stronger environment or is there anything you've been doing as a company from a sales and marketing perspective that is helping you perform better in these segments?

Speaker 2

Yes. We've had a diversification strategy for a couple of years now. I've spoken about that a number of times. We have hired some experts in our sales force to go after specific industries. As an example, The mining industry in gearing and material handling in gearing to help us diversify from oil and gas.

Speaker 2

As far as industrial fabrications, we are leveraging the capabilities we have at our northern plant That has excess capacity or available capacity because of the tower softness right now to go after markets such as construction, Material handling, mining, marine, and we've had great success there and growing success there. Plus, let's not forget our Proprietary products that are coming out. It came out last year and they will continue to come out over the next year or so. Furthermore, Industrial Solutions business, that's dependent on the global demand for natural gas utility scale global natural for gas turbine demand around the world and that is increasing. In fact, that's been at its highest point since the acquisition in 2018.

Speaker 4

Understood. Okay. That's all I have guys. I'll take my other questions offline. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 5

So first wanted to ask about the Abilene facility. Just given the bookings that you for that facility, the visibility into demand. Could you update us on how you're thinking about the capacity at that plant? Are you thinking about expansion? If so, how much capacity could you add?

Speaker 5

And what would be the timeframe? And then also if you could address What the cost might be in terms of the CapEx requirement?

Speaker 2

We're continuing to study opportunities to expand that plant. We've got customer interest In that plant and it continues to grow. We have conducted and continue to finalize studies on what it would take in terms of time An investment to expand that plant anywhere from 10% to upwards of maybe 50%. We're evaluating that and that could be an investment. I would say it could be $40,000,000 or $50,000,000 on the high side.

Speaker 5

Got it. Okay. And then you did indicate in the prepared remarks that the AMP credit balance is expected to increase through the year on the balance sheet here. I was wondering if you could just update us on your plans for monetizing that credit. Could you look to monetize the credit early or are you likely to wait for your tax return to get the cash payment there.

Speaker 5

It sounds like from others that we talked to, the pricing could be in the low 90s, $0.90 on the dollar or so, but just wondering if you could talk through kind of your strategy there?

Speaker 1

Yes. Thanks, Justin. We have been looking at monetizing them. The market has been slow to develop at least from our perspective. We're trying to reach out to interested parties.

Speaker 1

We've had several conversations. There's an aspect to the guidance that came out, which would make us kind of More inclined to transfer if possible. So we definitely were interested in doing so. But at this point, we don't have anything nothing is imminent at

Speaker 5

Got it. Okay. And then just one more on domestic content. We have received some guidance from the treasury on the domestic content requirements. And it looks like the towers really are going to have to be manufactured in the U.

Speaker 5

S. To qualify for the domestic content adder, so wondering if that's changed the discussions that you're having with customers At all, are you anticipating really the vast majority of U. S. Demand being met by domestic sources? And maybe you could just speak to what that might mean for the supply and demand dynamic that you're seeing out there?

Speaker 2

Yes. We do see we certainly are appreciative of that finding as a U. S. Company. We do believe It's in our customers and developers' best interest to buy U.

Speaker 2

S, buy domestic. And yes, that certainly helps With increasing the demand for our towers here in the U. S, I think There will be a good balance between the supply and demand curves going forward with some announced expansions in our industry plus the available capacity that we have and others have that can be brought online. So I think there will be a nice balance to support the U. S.

Speaker 2

Industry and maintain adequate pricing.

Speaker 5

Okay, great. I appreciate the time. Thank you.

Speaker 1

Thanks, Justin.

Operator

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

Speaker 2

Yes. Thanks to everyone who participated in the call today and listened to the call today, and we look forward to coming to you with our Q3 results. Have a great day. Thank you.

Operator

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

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