Broadwind, Inc.
Q1 2015 Earnings Call Transcript

Published: 2 May 2015

[Operator:]

Good morning and welcome to the First Quarter 2015 Broadwind Energy Inc. Earnings Conference Call. My name is Brandon and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the meeting over to Joni Konstantelos. Joni, you may begin.

[Joni Konstantelos:]

Thank you. Good morning, and welcome to Broadwind Energy's First Quarter 2015 Earnings Conference Call. With me today, are Broadwind's President and CEO, Peter Duprey; and Broadwind's Executive Vice President and CFO, Stephanie Kushner. This morning's earnings news release is available on our website at bwen.com. Before we begin today, I would like to caution you that this call will include some forward-looking statements regarding our plans and market outlook and also 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 8-K and the attached news release filed with the SEC this morning and our Form 10-Q which will be filed later today. We assume no obligation to update any forward-looking statements or information. Having said that, I will turn the call over to our President and CEO, Pete Duprey.

[Peter Duprey:]

Thanks, Joni and thanks for joining the call. I am going to start with the two areas which has the most significant impact on the quarter. The Abilene turnaround and managing through the West Coast Port slowdown. Stephanie later in the call will discuss each business in more detail and our expense reduction actions. Starting with Abilene, as we discussed on our last call, production ramped up slowly in the beginning of the quarter. By the first week of March, weekly production was up to eight sections. And we’ve seen further improvements in April. We are back on track in Abilene and production has become more stable and consistent. The new leadership team has completed all customer qualifications and we continue to make improvements to the facility. So the product flows though the plant in a more balanced way. In April, we moved to one of industrial Weldment fixturing tables out of the tower facility to open up a new Weldline eliminating some bottlenecks in the process. We remained focused on continuous improvements and are conducting a number of Kaizen events to improve the flow through the facility. With respect to the Abilene production issues, I believe we’ve turned the corner. The West Coast Port delays threw us a pretty big curb off for the quarter. The key was to preserve production slots which we were able to do successfully. In mid-January, we are running out of certain foreign source components and we had to quickly convert some of our production over to a tower design where the components weren’t more readily available. This resulted in an investment – in additional inventory of about $10 million, $5 million of which was in steel plate and $5 million was finished towers where we were not able to recognize revenue since we were producing ahead of the purchase order. This revenue will be recognized in Q2 and Q3. The team responded quickly and was able to save always these production slots. However, our liquidity position did suffer. But it will be replenished in subsequent quarters. We are on track for a great second quarter and I am proud of the efforts by the team to get these issues resolved and to move forward. Turning to orders. We did – gearing did a nice job in closing orders in the industrial segment given the slowdown in oil and gas. Q1 gearing orders also reflect a sizable order in wind energy replacement gearing markets. In towers, we closed a modest order for additional towers and I would characterize our discussions around 2016 tower orders as late stage. I would expect a significant jump in order intake in Q2. Turning to backlog, we’ve been burning down the large orders that were placed in 2013 after the extension of the PTC. I expect a similar trend in 2015 as we experienced in 2013 as a result of the passage of the PTC at the end of 2014. In total, 2015 orders should comfortably surpass the $78 million total for 2014. Turning to the wind market, 2015 and 2016 are poised to be strong. 2017 to 2019 will depend on a number of variables such as natural gas prices, reduction to the low life cost of wind, the ongoing build out of transmission, the ongoing support of state level RPS program and the implementation of the clean power plant. The turbine technology that’s in prototyping today should pull another 10% to 15% of the levelized cost of energy for wind. Rotors are expanding to over 110 meters in diameter for a generator size of around two megawatts. These turbines should perform well in the low wind regime and to open up new markets in the Southeast. These are data points I feel which shows the real momentum for the wind industry with a 23% of the PPA is executed in 2014 came from non-utility commercial customers, such as Microsoft, Wal-Mart and IKEA. A number of these companies have indicated they see real economic advantage of being able to lock into a long-term cost of energy with wind and solar. So all in all, we continue to be bullish on the future of wind energy. Turning to gearing. The team is navigating well through the dramatic downturn in oil and gas. Q1 there were some oil and customers were down 71% compared to Q1 of 2014. And we expect oil and gas orders for the year to be down more than 50% from the prior year. The team is working hard to generate a book-to-bill greater than one which they were able to accomplish this quarter. Thanks impart to a large order for wind replacement gearing that I mentioned earlier. Additionally, we were able to improve margin and recover nearly $3 million of revenue that was slated for Q1 but was pushed out by the customer due to the softness in the oil and gas markets. We’d likely will see some margin pressure for the remainder of the year. With both mining and oil and gas markets down, we are shifting our sales focus to other markets that show more signs of activity and we are monitoring orders and costs very closely. In response to this market softness, we initiated cost reductions across the company idling one of our Weldment facilities and consolidating our two gear box remanufacturing facilities. We have reduced headcount across the company to better align the cost structure with the current outlook. During the quarter in services, we also exited the shrinking kilowatt and community wind markets and we’ll be focusing on field service major repairs in gear box remanufacturing. I’ll now turn the call over to Stephanie who will cover the financials in more detail.

[Stephanie Kushner:]

Thanks, Pete and good morning. Turning to the consolidated Q1 results, our gross margin recovered slightly from Q4 of 2014, but remained very low due to the residual effects of the Abilene production issues, plus the added cost incurred to resequence power production as a result of the West Coast Port issues and also due to the weak results and $700,000 inventory charge for services. With these issues behind us, we are expecting a significant rebound in margins in Q2 and for the rest of the year. Operating expenses were down modestly to $5.7 million, although this represented a higher percentage of revenue due to the delayed power shipments. For the full year, we expect operating expenses to average under 9% of sales, about a 100% - 100 basis point improvement versus 2014. Consistent with our February earnings guidance, we’ve recorded a $1.9 million EBITDA loss and a loss per share of $0.34 in the quarter. During the first quarter, tower revenue was down sharply from 2014. Although we actually invoiced only five fewer towers. This is because in 2014, we were building a large number of four section towers, which generally have proportionately higher revenue. In fact, our year-over-year section count was down 12%, which is a more representative of the change in our activity level. The year-to-year comparison would have been much closer revenue-wise, if we have been able to recognize revenue on the 14 towers we held in inventory at quarter end. The more significant change was the $4.5 million drop in operating profit. In addition to about $1 million adverse timing impact from the towers in inventory, our production mix was less rich which depressed margins by more than $1 million and we incurred about an additional $2.2 million of cost to deal with residual issues in Abilene as we ramped up production and to expedite and move raw materials around to deal with the import delays caused by the West Coast Port slowdown. Lastly, profits on our Weldments product line were down about $600,000 due to product changeovers and low capacity utilization. As Pete noted, we are idling one of our Weldments facilities basically taking 45,000 square feet out of production in Manitowoc Wisconsin until end-market demand improves. As you can see in the bottom left-hand table, we expect to ship more than 140 towers in each of Q2 and Q3, which will support a rebound in revenue and earnings. Our outlook for Q2 is for $55 million to $57 million of revenue for the segment and operating income equal to more than 10% of sales inline with last year’s strong results. Our 2015 objectives for this segment have not changed. On the market side, we are focused on selling out our tower capacity by next year and new markets to grow our Weldments product line. We are also making some changes to our tower production processes to reduce cost and improve productivity. And lastly, our team is working to improve the utilization of our business system for both the tower and Weldments product lines. As many of our business activities have historically been managed outside of our ERP system. Turning to gearing, we did reported year-over-year increase in orders, but as you can see in the pie chart on the bottom left, the composition of the orders shifted with a sharp reduction in oil and gas and a corresponding increase in orders for replacement wind gearing. Revenue was about flat versus last year, we are operating more efficiently and able to quote shorter lead times with greater certainty. The operational improvements reflects the impact of the consolidation investment, which has yielded a more efficient plant layout and lower overhead cost. Additionally, we benefited in the quarter from lower material cost. Our operating loss dropped to $1.2 million, slightly less than our depreciation and amortization for the segment. So we achieved positive EBITDA. For Q2, we are projecting similar results. Revenue in the $8.5 million range and a loss in the $1.5 million range. Although we have made some additional expense reductions, we are seeing pricing pressure in the weak market environment, so these cost savings are in essence being passed on to our customers. Our 2015 objectives include cross-training of our labor force to improve productivity, particularly at today’s lower volumes, continuing to control our expenses and working capital closely and of course to expand our sales efforts to improve our capacity utilization. Services had a disappointing quarter with orders and revenue down sequentially and versus the prior year. As you can see in the bottom left-hand chart, blade services revenue was much stronger a year ago when we were supporting repairs linked to a serial blade defect at one of our key customers. We are taking action to consolidate our two gear box repair shops to reduce our overhead expenses and to improve capacity utilization. We intend to idle our 25,000 square foot shop in South Dakota at the end of the second quarter following the build out of our current orders. This should help us approach breakeven earnings for the second half of the year. At the same time as closing the shops, we are largely exiting support of the very small community wind size turbines and both small-scale kilowatt turbines. Both markets are shrinking and current margins do not make this work economic for Broadwind. We took a $700,000 reserve in the quarter against shop inventory, mainly associated with these product lines. As shown on the left-hand chart, as Pete commented, our gross inventories rose to a record balance of $49 million this quarter, up $12 million from year end. THE spike reflected the unusual circumstances in the quarter. Our tower steel plate inventory, which is delivered to us sized for each specific tower design was up $5 million because of the lower Abilene production during Q4 and early Q1. That steel will be consumed later in the year. And finished goods inventories were up $5 million due to the invoicing delay we already talked about and because of rescheduling some gearing orders. As you can see, our inventory balances are quite variable influenced by considerations such as opportunistic steel buys and customer mix as well as production efficiency and the general business level. However, we overwhelmingly build to customer order not to stock. So we have good visibility on the reduction later in the year, Due primarily to the spike in the inventories and also because of a run-off and a portion of our customer deposit, our operating working capital, which includes receivables in inventories less payables in customer advances doubled to just under $30 million at the end of March equivalent to 15% of sales. Although this is a good number for a typical manufacturer, this is a high working capital level for us, because we build the stock and generally receive advance payments for custom work from our customers. Our projection is for that working capital percentage to decline slightly during Q2 and Q3, and ended the year under 10%, because our sales will climb in Q2 and Q3, we won’t actually release significant cash from working capital until the second half of the year. The high inventories will flow into high receivables and the customer deposit balance will decline for the several months. Having said all that, due to generating positive operating earnings, our net debt position will improve modestly in Q2 and Q3 and by year-end, we expect our credit line will again be undrawn and we will have in excess of $10 million in cash. We don’t expect to have as much cash on hand as year-end 2014, because customer deposits will probably not be as high on the mix of tower orders that we are currently booking. Net PP&E continues to decline as capital investment trails depreciation. During the first quarter, our capital spending totaled less than $1 million versus depreciation and amortization of $2.6 million. Our full year capital spending should approximate $5 million to $6 million and we expect it to realize proceeds from asset sales of approximately $1 million. Our debt balance was $4.9 million at March 31 including $1.2 million drawn against our $20 million line of credit. We are currently in negotiations to extend or replace our credit agreement this quarter with some improvement in terms. Our Q2 outlook is strong. We expect $66 million to $68 million of revenue, good – gross profit of 9% to 10% and operating income of between $1.5 million and $3 million. This translates into EPS of $0.09 to $0.18 and EBITDA of $4.5 million to $6 million.

[Peter Duprey:]

So it’s a difficult quarter, but I do think we learned a lot from it. As I previously mentioned, I believe the Abilene issues are behind us. The port issue we managed through I think, quite well by not losing any production slots. As Stephanie just mentioned, Q2 will rebound nicely to $66 million to $68 million in revenue and EBITDA of $4.5 million to $6 million and with the business returning to profitability. We do expect to close a major tower order in Q2, and for the year, we believe we can achieve production and sales level of 500 towers for the year, which will be a new milestone for the business. We do expect that inventory levels will come back in the balance after the port issues are all resolved and the cash balance to return to around $10 million to $12 million by the end of the year with no borrowing on the bank line. So, I think we are returning to where we were back in Q2 with high level of revenues and profits. And now, we’ll open it up for questions.

[Operator:]

[Operator Instructions] And from Macquarie we have Angie Storozynski online. Please go ahead.

[Angie Storozynski:]

Thank you so much. So, you mentioned the differences in margins for different powers, so can you tell us when you got your backlog, what’s roughly the split between the four piece towers and to just the standard towers, so we can actually have an insight into margins?

[Peter Duprey:]

Well, as far as the number of sections per tower, they are all resection towers.

[Angie Storozynski:]

Okay.

[Peter Duprey:]

As far as margins go, we don’t usually disclose the margins on our backlog.

[Stephanie Kushner:]

Maybe the way I said it was confusing. So, a four section tower is necessarily more or less profitable than a three-section tower, but it does have more revenues and therefore more profit dollars.

[Angie Storozynski:]

Okay, okay. So it’s just okay how your revenues, that’s fine. And then, okay so, we are back to much where we were back in 2014, right that this is the – you will be at your – add capacity in 2015 for towers and then gearing and services are still struggling and I get it that the oil and gas sector is not helping. But, I mean, is there – do you feel like there is a need for more of a strategic shift for the gearing business? I mean, either further reducing the activities or maybe completely, I don’t know refocusing on the industrial customers more so? Is it even possible?

[Peter Duprey:]

Hey, Angie, I would say that the gearing business over the last 18 months has gotten better even with the headwind in the oil and gas and mining markets. For the year, it’s just about at a cash flow breakeven point of view. So, some of these cost initiatives that we took at the end of Q1, I think, we’ve scaled the business so that it can be cash flow breakeven at roughly $40 million revenue rate. So, if oil and gas and mining come back, I think a lot of that incremental revenue will drop to the bottom-line. So I think we tried to scale that business to kind of where the current revenue environment is and as the market starts to return, that should start to throw more cash and we can benefit through the profitability, I think in a reasonable timeframe.

[Angie Storozynski:]

Yes.

[Stephanie Kushner:]

Probably we are…

[Angie Storozynski:]

Yes, sorry.

[Stephanie Kushner:]

Probably worth adding also, we didn’t actually complete the consolidation of that plant in terms of fourth quarter of last year. So we are just not starting to reap the benefits of that more materially.

[Angie Storozynski:]

Okay. And on the services side, so, are we just waiting simply for the wind farm fleet to age further, so that there is more of a pick up in the refurbishment services needs? Or, I mean, if you think about it, most of the wind farms, if you think of the peak of installations will start between 2005 and 2007, I mean, by now, I mean, they are seven or eight year old. Is that usually when the major maintenance kicks in?

[Peter Duprey:]

Yes, I think that’s been our feeling all along is that, as the portfolio ages, we would expect to see more activity. Admittedly, the first quarter was a low level of activity and we took some cost initiatives to exit the kilowatt and community wind. Then we started to really look at the various markets – we didn’t see that as a growing market and felt that given the cost that we would just get out of those segments and then we closed the Howard or we are in the process of closing the Howard remanufacturing facility and then we would expect that Abilene would do all the gear box remanufacturing. So we are trying to take some steps, so we are taking steps on the cost side for services to get things more inline…

[Angie Storozynski:]

But that’s something that – so who provides those services? So, some of it has no demand for those services or is this just a OEMs are doing it internally?

[Peter Duprey:]

There are some independent service providers, not too many on the gear box side. The OEMs obviously do, re-manufacturers some equipment, but part of our thesis is that, being an independent gear box re-manufacturer, we can look at the design a little bit differently and maybe reengineer some improvements to the box. That’s certainly what we do on the industrial side. And – but, it has taken us longer to get traction there.

[Angie Storozynski:]

Okay. Thank you.

[Operator:]

We have no further questions at this time. I will now turn it back to Peter Duprey for final remarks.

[Peter Duprey:]

Yes, just it was – I think, the underlying point here is that, we are – we’ve navigated through the tower issues. I think we’ve got that back on track. So, as we look at 2015 second quarter, we think we are going to be very much inline with Q2 of last year, which was a good quarter, a very good quarter for us. So, it’s been a rough kind of couple quarters here, but I think we’ve navigated through it and then I do appreciate you joining the call and from an investor point of view, your patience. So, thanks very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.