Broadwind, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Welcome to the Broadwind Energy Q2 2015 Earnings Conference Call. [Operator Instructions]. I'll now turn the call over to Joni Konstantelos, Director of Investor Relations. Please go ahead, ma'am.

[Joni Konstantelos:]

Thank you. Good morning, and welcome to Broadwind Energy's second 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 www.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-K 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, Peter Duprey.

[Peter Duprey:]

Overall we had a solid second quarter, our results were in-line with guidance that we provided on a Q1 call and probably more importantly our results - our Q2 results are in-line with the Q2 results for the prior year driven by the operational recovery of the towers division. Our gearing business continues to grapple with weakness in the oil and gas mining markets but was able to offset the substantial reduction in revenue with aggressive expense management and lower restructuring and depreciation cost. Also this morning in our press release we announced that our Board of Directors approved the plan to evaluate strategic alternatives for our services business. We had some consolidation occurring in the wind service market with greater importance being placed on stronger, well-capitalized businesses we believe now is a good time to look at alternatives. Turn slide 3, please, we will start with the tower business. Our Abilene facility is back on track as the upper chart shows with the average weekly section production increase to eight sections per week up from five sections in Q1, 2015 and in-line with the prior second quarter. We continue to work to refine our process flows, our shop or constructions and to better optimize the flow through the plan. We made significant strides in upgrading the Abilene team and ensuring they can work together to achieve the production targets. [Indiscernible] to our facility, the plant continues to run very well. Our continuous improvement or CI efforts as call them resulted in a 25% increase in the average weekly section production in Q2 2015 compared to Q1 of 2014. The outstanding performance at the Manitowoc clinic enable us to stay on track and to make up production short falls that occurred in Abilene . With Abilene production margin system and Manitowoc continuing its strong production output, tower is on track to have a good year. Turn slide 4, floors in improved in towers and services thanks mainly to a $50 million order for 2016 production that we announced in late June, during orders where we can due to softness in the softness oil and gas and mining markets. I will point out that in Q2, 2014 Gary received a large annual order for wheel replacement which in 2015 is being split over multiple quarters. Service orders totaled 4.7 million in Q2, up seasonally as expected. The backlog totaled a 169 million at Q2, 2015 but the important point is over 90% of the estimated second half of 2015 revenue was in backlog at June 30. We’re currently negotiating tower orders for 2016 and 2017 and we’re seeing a more competitive tower market. We’re seeing some towers being imported from Canada for some Mid-West projects and from Mexico to serve the largest demand that’s currently in Texas. Turning to slide 5, earlier last week a two year extension on the production tax credit was included in the tax extenders bill that was passed by the senate finance committee. The bill is drafted similar to the extension that occurred in 2013 and 2014 whereby a 5% of the project cost is committed or construction starts by 2016 and is completed by 2018 or longer if the owner can demonstrate continuous construction, the project owners will qualify for PTCs. If this legislation is an enacted this will give the industry a very good visibility through 2018 and will allow turbine manufactures to get through another product release cycle. The next step is to send the extenders package to the senate for approval and the reconcile senate bill with any ideas coming out of that. Their strong bipartisan support for the PTC and we’re hopeful we can get this passed before the elections heat-up. Let me talk a little bit a clean power plant are also referred to as rule 1-11D proposed by the EPA and continues to show positive signs for the wind industry. This is a refresher, 1-11D proposes state by state targets on reducing carbon emissions from new and existing power plants. So far the EPA has given states suggestions on they can comply but really left it up to the states to determine how they will meet the stingers. The U.S. Energy Information Administration or EIA issued their analysis on the EPAs clean power plant in May of 2015, and estimated over 100 gigawatts of incremental win could be built to achieve the targets set forth in 1-11D. The cost of wind energy has come down close to 60% since 2009. Further technological advances such as taller towers, longer blades which drive the cost of wind energy even lower even further. The EIA estimates that wind account for over half of new additions to meet the compliance targets. The significant additions in Illinois, Ohio, Pennsylvania, Oklahoma and Michigan. Broadwind is well-positioned to take advantage of the growth of these areas, more clarity on the clean power plant is expected in August of this year. We believe this policy supports the long term sustainability in growth of the wind industry in the United States. Turning now to slide 6, I will talk about our gearing business. The gearing segment continues to deal with weak oil and gas market in light of the dramatic an sudden downturn in activity, customers are bringing up inventories in Q1 and Q2 and we would expect some pick-up in demand in the back half of the year but certainly not returning to the levels we saw in 2014. Our aggressive cost management actions are helping offset some of the volume short fall. Our current sales focus is to work more closely with our existing customer base by providing enhanced engineering support, stocking programs and volume discount and on a limited basis we’re also looking to partnering opportunities outside of the United States. And with that I will turn the call over to Stephanie to go through the financials in more detail.

[Stephanie Kushner:]

Thanks, Peter. The second quarter represented a big improvement from Q1 with the revenues rebounding the $65.2 million thanks the improved performance of our tower business. Both the [indiscernible] product line and the gearing segment had continued to be impacted by the weak energy and mining markets and sales from our services segment trailed both prior year and our outlook. Our gross margin [indiscernible] nicely in the first quarter 11.1% in Q2 up from a very low 1.4% during Q1. We trailed last year's gross margin primarily because of weakness in our involvements in services business. As we mentioned last quarter we’re idling one our [indiscernible] plant and have consolidated our two gear box manufacturing shops into one to reduce overhead in-light of software demand. Our operating expenses averaged 8.2% of sales a record low for Broadwind. This reflects the benefit of the cost reduction activity that we initiated at the beginning of the year. Our cost management is making a difference. In fact our Q2 overhead expense was down a $1 million from Q1 which exceeds the $600,000 quarterly target we decided in April. As Pete we mentioned we returned profitability in the quarter and earned $0.11 per share in the middle of our $0.09 to $0.13 guidance. Turning to slide 8, Pete has already talked about the timing on tower orders which were up sharply from a very low prior year figure. Sales in the quarter totaled a 142 towers right in-line with our outlook and $55 million in revenue at the low end of our guidance. We invoiced two of the towers that ran inventory at the end of the first quarter and that cash has been collected. This puts us at 245 towers sold in the first half in reach of our 500 tower target for the year. Given the port issues that we experienced in Q1 the towers team navigated very well through a significant disruption. Despite the uptick in towers sold our revenue was up only $2.1 million from the second quarter of 2014, this was because enrollment sales were down 1.5 million and also because last year's towers sales included some higher priced four section towers. Our heavy weldments product line has been operating at a very low capacity level for the past few quarters. As a result we’re idling our Wisconsin production facility and work in new market opportunities to expand outside of our traditional mining and oil and gas customers in order to improve our orders well. The segment's operating margin rebounded nicely to 13% in the quarter at the high end of our guidance. In addition to the volume growth, we benefited from sequential improvements in labor productivity and in lower variable overhead expenses. Q3 also was strong for this segment, on the revenue side we expect 51 million to 53 million down slightly as we’re now caught shipping towers in inventory from the first quarter which boasted Q2 by $4 million. On a positive side we expect revenue from our Abilene plant to be modestly higher as its hit the smoother operational stride. We continue to work on continuous improvement projects to reduce our production cost and are focusing primarily on the welding and paint system. Turning to slide 9, Pete has already talked about the weakness in getting orders and efforts to get this back on track. At $8 million our Q2 revenue was in-line with our guidance but down 36% from the prior year quarter. As you can see in the pie-chart at the bottom on the page the share of orders from oil and gas customers is down significantly. However we were successful in narrowing our loss to $1.5 million despite the revenue decline. The improvement was the completion of the restructuring project which cost us $500,000 in the prior year quarter which has improved through the plant, reduced inventories, contributed to improved productivity and reduced cost. And depreciation is lower as assets become fully depreciation and new capital additions have been managed judiciously. Lastly our contribution margins were some 300 basis points from a year ago to the richer mix, better management of consumables and direct labor and lower manufacturing grants. This business is working aggressively to improve profitability despite the weak market. We’re expecting Q3 revenue and operating income to be in-line with Q2 about $8 million of revenue and a $1.5 million operating loss and continuing near breakeven EBITDA. Turning to slide 10, services had a disappointing quarter. Although orders were up in the quarter this only offset part of the weaker backlog we had at the end of the first quarter. Revenue declined 23% to $2.7 million with both the gear box shop revenue and blade field work down from last year while the rest of our field activity was solid. $400,000 of revenue fell out of the quarter as the customer did not take delivery of gear boxes that were completed during Q2. Our operating loss widened to 1.8 million including $400,000 of inventory charges triggered by the shop consolidation at the end of June. With these inventory charges behind us and with reduced overhead due to closing our South Dakota shop at the end of June, our third quarter outlook improved with revenue approaching $4 million and a loss in the $500,000 range. Slide 11, as expected our inventory balances started to decline in Q2 and our inventory turns improved from 4.4 last quarter to 5.4 in Q2. However this is still well-below the 6 to 6.5 turn figure that is more difficult for Broadwind. Much of the expected reduction will incur in the back half of the year. As you can see in the top left chart although finished inventories dropped nicely as planned, raw material inventories actually rose in the second quarter. The increase was predominantly empowers and reflects some inbound material buys that were not accurately picked up by our ERP system. At the end of September our gross inventories should be down another 5 million to 7 million and then by year-end a further $3 million or so. As shown in the right hand chart, our operating working capital as a percent of sales was flat at 15% which as I’ve said in the past is at the top end of what we consider a normal range given the mix structure of our business. By year-end the absolute orders and working capital should drop by about $15 million and our working capital percentage should be back below 10% of sale. On slide 12, at June 30, our cash balance was up slightly from March 31, but remained low because we were utilizing our credit line. We expect that credit line to be undrawn and cashed to exceed $15 million by year-end. Our operating working capital exceeded 38 million high any recent measure. That was somewhat higher than anticipated because of the higher raw materials inside and also because the customer deposit expected before June 30th was delayed until early August. Net PP&E continues to decline as we invest capital more slowly than we depreciate our existing asset base. Through June 30, our capital spending totaled $1.6 million and we now anticipate full year capital spending to be about $4 million less than half the full year depreciation charge of 9 million. The increase in debt reflects the funding for the rise in working capital when we renegotiated and extended our bank line we maintained the same overall $20 million size, that’s converted to $5 million portion to term debt. This is beneficial to us because it actually improved availability under the line. The $5 million term loan amortizes down by $60,000 a month so it will be about $4.7 million at year-end. And finally our other liabilities declined as we made payments and settlement of the regulatory issues that has been resolved in recent quarters. So turning to slide 13, Q3 should be another strong quarter for Broadwind and since our Abilene operational issues began in the third quarter of 2014 our year-over-year comparisons will turn significantly positive. We are forecasting Q3 revenue in the $63 million to $65 million range, our gross margin continuing in the 10% to 11% range about the same as we experienced in Q2 and operating profit of $1 million to $2 million against the loss last year of $1.8 million. This should provide EPS of $0.07 to $0.12 a sharp improvement from last year. EBITDA in Q3 should more than double from last year and be in the $4 million to $6 million range. Projected year-over-year improvements reflect the hard work our business units have put in to improve their operational performance while we have been managing cost aggressively across the corporation and as I said earlier our cash position should begin to turn meaningfully positive. That completes my prepared remarks I will turn it over to Pete just some final thoughts before we open the call for Q&A.

[Peter Duprey:]

So to summarize the quarter, I think the take away plan is the charge is getting back into the stride that it was in a year ago before the Abilene issues. Now as Stephanie just mentioned now the Q3 guidance is 63 million to 65 million in revenue and 46 million of EBITDA. I would expect further progress in rounding out a major tower order in Q3 and I still believe that 500 tower production for this year is achievable. And as Stephanie mentioned from the liquidity point of view by the end of Q3 our cash balance should be returning to a $5 million to $7 million range as the inventories continue to burn down. And by the end of Q3 we should have some better direction regarding new strategies around our services business. So I think there are some very good reasons why here got to be optimism around Broadwind. We will now open the call to questions.

[Operator:]

[Operator Instructions]. And we have a question from Jimmy Baker from B. Riley & Co. Please go ahead.

[Jimmy Baker:]

I just wanted to first drill down on single liquidity commentaries so I understand you’re not giving consolidated full year guidance but you did indicate that cash balance will end the year by about 50 million, I just want to confirm if given your commentary regarding no drawings on the ABL, that you are actually guiding to 50 million of net cash at year-end and then to achieve that level of cash generation is it fair to say you expect Q4 EBITDA to be comfortably positive, just doing the math it seems like you need a little more than just a Q3 EBITDA and working capital cost to get there.

[Stephanie Kushner:]

So just to clarify, I really haven't changed my guidance from last quarter. And when I say above 15 million we do have that term loan in place now which will be at I guess $4.7 million at the end of the year. So last quarter I said about 10, now I'm saying about 15 but in the interim we put - it would be $4.7 million debt on the book.

[Jimmy Baker:]

Okay, so north of 10 million in net cash at the end of the year?

[Stephanie Kushner:]

Yes and then we’re certainly focused on having positive EBITDA every quarter including Q4 and we really are not giving specific guidance beyond the third quarter.

[Jimmy Baker:]

And maybe you can just speak to the impact on the profitability from [indiscernible] when did you idol that facility? Did you see any impact in Q2 or is that incremental and then I guess separately indicated that [indiscernible] strength in orders during Q4, can you just talk about what's giving you that confidence and if there is any relationship that we should be aware between those customers and weldments?

[Stephanie Kushner:]

Yes, we haven't idled the facility because we’re building out current orders. We haven't idled it in the second quarter. But we will see the effects in the third quarter. It's not a huge number in terms of fixed overhead maybe a couple 100, thousand dollars partly because we’re going to be using some of that space to kind of improve the layout of some of our tower inventory. So just to be able to help the tower floor up at Manitowoc since its operating at such a high capacity level.

[Peter Duprey:]

And then Jimmy with respect to the gearings side of the business, I think the drop in the oil and gas market was so dramatic and rapid that whatever inventory our customers had on hand they just sort of almost stopped orders, earned their inventory. So what we’re seeing for Q3 and Q4 we would expect some uptick in coming orders around the oil and gas market but clearly not to any level that we saw last year. Weldments is maybe not as dramatic but we’re not seeing really much of an uptick in the mining market, I mean what's going on in China and [indiscernible] I don’t think they are painting a real optimistic picture. So we’re working through that in our heavy business and I think certainly idling the Manitowoc facility makes sense. There was more activity in our heavy Abilene facility so we’re watching the cost very, very closely.

[Jimmy Baker:]

Okay, then on the tower side of the business very nice improvement there, where do you stand in terms of available capacity for 2016 where would you like that to be at year-end, should we take your commentary regarding the competitive environment I mean that 2016 capacity is potentially being bit out at lower margin?

[Peter Duprey:]

So where we’re on towers is we’re about 30% sold for '16, you know I said in my prepared remarks that I would expect a another major order in the third quarter so I would say by the end of the third quarter we have sold out north of half of our volume for 2016. The comments around the competitiveness of the tower market is we’re seeing as I said tower is coming in from Canada and from Mexico. I think that Texas market there is a lot of activity in Texas. I would say that in the northern market there is probably a little less demand. So I'm expecting some pricing pressure. We had in place some initiatives to reduce cost. So I don’t see a huge impact on margins for 2016 but certainly the market is not as strong as it was say in 2013 and 2014.

[Jimmy Baker:]

And then lastly, could you just provide us a timeline for a strategic review of your services segment and I bet you’re going to speculate no potential outcomes but if you were to exit that business would you expect to see any impact of the balance of your [indiscernible] in terms of either customer loss of cost absorption issues or is it simple as just doing the math that if you exit you gain another 5 million or so in annual EBIT from the renewal of the losses.

[Stephanie Kushner:]

Yes the path is pretty straightforward, we have sum gears that are sold into our services business but it's not a material item. I think in terms of timing our objective would be to get this finished by year-end.

[Operator:]

And our next question is from Angie Storozynski from Macquarie. Please go ahead.

[Angie Storozynski:]

I want to tickle back to competition towers and potential margins. Now is this the only worry that you’ve, I mean is there a chance for instance that your volumes overall for towers would come down because of competition?

[Peter Duprey:]

Yes there is always that possibility but we’re in a pretty deep discussions with a number of customers and - I still see a lot of demand and particularly when you look at what's happening in Washington as well as the comment in made on clinging to our plan that - I think there is enough activity out there where we should be able to get closer to the capacity levels we run in the last couple of years.

[Angie Storozynski:]

Can you remind us what is the annual capacity of the towers?

[Peter Duprey:]

It's 500 towers a year.

[Angie Storozynski:]

And then you guys are not providing guidance for the fourth quarter, is it purely because you’re in discussions to diverse the services business and that would be an ensuing factor that guidance would be basically binary?

[Stephanie Kushner:]

It's something we agreed with our board earlier this year given some of the volatility that we were seeing in the markets that we would just keep our guidance a little shorter.

[Angie Storozynski:]

Okay so you’re not going to be able to provide any outlook for 2016?

[Stephanie Kushner:]

Yes I said volatility in markets and it's really volatility in our operations as well, so it's really both of those factors. I think we will get more comfortable and more confidence as time goes on.

[Operator:]

[Operator Instructions]. Showing no further questions at this time we will conclude our question and answer session. I would like to turn the conference back over to Peter Duprey for any closing remarks.

[Peter Duprey:]

Just appreciate everybody joining the call. As I said overall I thought it was a good recovery from our troubles in our Abilene facility I think that’s now behind us and frankly we’re very optimistic about the future and look forward to reporting the third quarter results in the few months. Thanks for joining.

[Operator:]

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