Broadwind, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Welcome to the Broadwind Energy Q3 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Joni Konstantelos. Please go ahead.

[Joni Konstantelos:]

Thank you. Good morning, and welcome to Broadwind Energy's third 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:]

Good morning. Let's start on slide 3, this morning with announced our three quarter results which were in line with our previous downward revision for the quarter. It was clearly a tough quarter, our Manitowoc facility had been performing above expectations for most of the year, they experience quality issues with the supply chain and challenges in paint production. I am pleased to report that the steel quality in paint production issues have been corrected and production is flowing normally. We have implemented a remediation plan that includes performing sample testing of the quality of incoming steel plate at both production sites. Developing more detailed supplier scorecards and better integrating performance into future buying decisions. Implementing a more robust total productive maintenance program in both facilities and increasingly lead times for certain foreign source components. We enter 2015 with a sold out production capacity. We’ve learned that in order to run a full production capacity everything has to go right, leaving little to no room for production or supply chain hiccups. In a manufacturing process with a global supply chain not everything is going to go as planned. We experienced a number of challenges from the West Coast port slow down to supplier quality and delivery issues with internals. We also experienced above average unplanned equipment outages for 2015. We have increased our efforts on planning and prevention ensuring our equipment is properly maintained and planning for more frequent outages, it gives us better control over the flow of material through the plant. When an unplanned outage occurs we need to ensure that we have replacement parts on the shelf and we can get them quickly to minimize any downtime. In areas where we do have production constraints we are looking at increasing capacity in order to alleviate these bottlenecks. We are currently looking at a modest additional investments particularly in the paint capacity. Turning to slide 4, are over 13 gigawatts currently under construction in the U.S. with over 50% of the activity occurring in Texas and Oklahoma. Over 6 gigawatts of wind energy are in various stages of construction in Texas alone. This has resulted in balance in demand between our Texas and Wisconsin facilities for 2016. Additionally we see further wind development in the Midwest as older coal plants are retired and replaced with wind and natural gas generation. I think the punch line is there's an awful lot of activity going on in the U.S. in the wind energy market. On slide five. Our orders are down from Q3 2014 mainly due to the unpredictable timing of order intake in towers. Feedback from our customers our tower customers indicate some of their customers have reserved production slots for 2016 but these slots are not fully committed, until project owners get certainty around permits and the ability to complete projects in 2016 they are not placing firm orders for turbines plus OEMs not placing firm orders until they get committed orders from their customers. We are in active discussions and would expect a significant order in Q4. This is a prime example of how uncertainty around the renewal of the production tax credit disrupts the supply chain. The industry continues to actively lobby Washington and we continue to be confident in a renewal before the end of the year, albeit likely late in the year. For gearing orders we were flat with the prior year which actually is quite good considering the significant downturn in the oil and gas market. With more than 49,000 turbines in the ground in the U.S. wind energy replacement gearing market represents an area of growth in terms of the markets that we serve. Our quoting activity for wind gearing has been increasing and we booked over 7 million in orders in Q3. Finally with respect to our services business, this segment is now being reported within discontinued operations. We have met with numerous potential buyers and have developed a short list of bidders for all of part of the business. We expect to close a transaction for a major part of the business by the end of the year. I will now turn the call over to Stephanie to cover the financials in more detail.

[Stephanie Kushner:]

Thanks Pete, Q3 revenue of $49.8 million was down 10% from last year and in line with our revised guidance, when you adjust it to remove $3 million for services revenue. Our gross profit margin of 5.7% was impacted by the relatively lower volume, operating expense was flat with the prior year and included an $874,000 reserve addition that was for remediating the soil contamination at the curing plant that we vacated at the end of last year. Our operating loss from continuing operations was $2.1 million and our loss per share was $0.16. This brings our nine month result to a loss of $0.10 per share. Adjusted EBITDA was $1.4 million for the quarter and $7.7 million year to date. We recorded a $5.2 million loss below the line, related to the discontinued services business. This included a $4.5 million impairment estimate associated with the planned divestiture. On the next slide we recorded only $3.2 million in net orders for the towers [indiscernible] segment in the third quarter. We did have a $7 million follow on tower order with a $5 million cumulative adjustment to reduce the steel price retroactively on an order already in backlog. This is because steel prices which are a significant part of the cost of a tower have been declining. Because steel is essentially a pass through to our customers this doesn't impact our economics, but does change the reported order number. For the nine months orders are slightly above last year despite the pricing adjustment. For 2016 we have about 200 towers in our backlog and we are negotiating to close our final orders for 2016. We sold a 112 towers in the quarter, 5% more than 2014 but our sales revenue actually declined by 5% mainly because we had no four section towers in our current year mix and the towers we built were less complex and priced lower. Our operating income dropped to $2.2 million down $1.2 million from last year, half of the reduction was due to the mix of towers built and the other half due to higher labor costs, both direct and indirect. Our indirect labor expense ran high due to challenges involved with the off spec steel we initially tried to process. And because of high usage of QC labor as we were struggling to deal with challenging environmental conditions and to correct problems that at our paint line. The segment's operating margin fell to 5% in the quarter bringing the year to date figure to 8% and the EBITDA margin to 10% for the nine months. Q4 will also be a weak quarter for towers in line with Q4 last year. Although Manitowoc is running well, we're building towers in Abilene today which have some challenging weld and paint specification. So plant throughput is low and we continue to experience unusually high labor hours. Additionally due to our lower production we may have to cover some out of pocket costs to meet our customer commitment. For these reasons we are forecasting $37 million to $38 million in sales and breakeven operating income for the quarter for this segment. Turning to slide 8, gearing orders totaled $9 million about the same as the third quarter of 2014. Year-to-date orders are $22.5 million down 37% from last year. As you can see in the pie chart in the bottom left, the composition has changed from last year. Notably the drop in oil and gas orders and the increase in wind energy gearing. At September 30, the business had a backlog of about $20 million. At $7.2 million our revenue was slightly below our $8 million guidance but down 30% from the prior year quarter. We're making cost structure adjustments to deal with the lower near term revenue outlook. Our operating loss of $2.6 million included the $874,000 increase to the environmental preserve. Excluding this item the loss was $1.8 million in line with guidance and would have compared favorably with the prior year despite the reduced revenue. We are expecting Q4 revenue at just under $7 million and a $2 million operating loss. We are doing an end to end assessment of customer profitability and reviewing all operating and administrative processes in order to further reduce costs and improve our financial results for the segment. On slide 9, as we had indicated the inventory reduction that began in the second quarter continued in the third quarter and growth inventories dropped another $5 million. The reduction was in raw material as we continued to process surplus steel plates that was on hand earlier in the year. As you can see from this chart we are getting closer to a normalized raw material inventory level and we expect another 3 million to 5 million reduction in inventories before year end. As shown in the right hand chart our operating working capital as a percent of sales was 14% for the quarter. This chart is now been restated to exclude services which was a relatively higher working capital intensive business. Therefore the numbers have shifted downward. At year-end we expect operating working capital to drop below $20 million or about 12% of annualized Q4 sales. Turning to slide 10, our balance sheet has strengthened as expected this quarter. Cash rose to just under $5 million dollars, operating working capital came down to $28 million due to the inventory, our net PP&E declined to $53.6 million as capital spending continues to run less than the sum of depreciation plus asset sales. Through September 30, capital spending totaled $2.3 million and proceeds from asset disposal totaled 1.2 million, the net or 1.1 million is well below our $6.9 million of depreciation. And you can see the assets held for sale it's been increased to include services. Our debt and capital lease balance was $8.1 million, this reflects a $5 million term loan we booked in Q2 plus a limited amount of other debt most of which was low interest or forgivable development loans. Our balance sheet should strengthen again in Q4 increasing cash to 10 million or more and further reducing working capital. On slide 11, the figures have been adjusted to exclude services from continuing operations. Our fourth quarter outlook is for consolidated sales of $44 million to $45 million and a $45 million operating loss. Power production is expected to drop back to about 100 towers down from 112 in Q3, this will result in slightly negative EBITDA for the quarter and a loss per share in the range of $0.29 to $0.36. We remain focused on reducing costs and improving our manufacturing flow to make sustained improvements in our profitability. We expect to close the tower negotiations currently underway So the 2016 will be adequate capacity utilization level, and we expect to generate another $5 million in cash and end the year with about $10 million in cash excluding any proceeds that may be received for the sale of services for which the timing and the value is still uncertain at this time. That completes my prepared remarks. [Technical Difficulty]

[Operator:]

[Operator Instructions]. The first question comes from Jimmy Baker of B. Riley & Co. Please go ahead.

[Jimmy Baker:]

Just hearing about the negative mix and how that's now impacting your Abilene plant it just seems like you would have known that looking ahead at your backlog, so can you just maybe elaborate on that and what's changing there. And then separately I guess when you look at your 2016 backlog and even what you're bidding on currently. Are you bidding on towers that you're confident you can produce more profitably, you know I understand you have the supplier issue in in Q3 three but it does sound like quite a bit of this might be self-inflicted with regard to what you've been on to fill the capacity.

[Peter Duprey:]

With respect to Abilene we've been we've been running two types of towers through that facility, two different customers. In the fourth quarter it's one customer and probably the customer with the most tight specifications and therefore it goes through a bit slower than having more of a balanced mix. So that's why the forecasts for lower through put in Abilene. And then looking forward I think we will go to a better mix and with respect to what happened in the quarter I would say the issues with steel were probably -- I think if you look at the roughly 30 towers that fell out of the quarter probably half of it was related to steel and half of it was relayed to paint issues which I think was somewhat self-inflicted. And so I mean that's really what happened in Q3.

[Jimmy Baker:]

Okay. And then just following on to that I think maybe Stephanie mentioned that you're aiming to reach a good capacity level in 2016 for the tower business. I guess just putting that with the comments about -- if I'm paraphrasing right. You know wanting to leave yourself a little bit more of a margin for [indiscernible], what level of utilization would you say is kind of your target range in towers going forward?

[Peter Duprey:]

Yes I would say we're probably talking mid-400s for capacity on a consolidated basis.

[Stephanie Kushner:]

But maybe if we do put in more paint capacity.

[Peter Duprey:]

Yes. I alluded to it in my comments that we've got a lot of demand in Texas and probably a little less in Manitowoc, so we’re looking at paint right now is the constraint in our production so we are looking at some ways to improve paint throughput either by adding a booth or looking at some automated systems.

[Jimmy Baker:]

And just regarding the services divestiture my understanding your commentary correctly that you would expect to be able to announce a sale of the majority of that business, by the end of the year but there is a piece or pieces of it that you may operate into '16.

[Peter Duprey:]

No I think the expectation is that business will be wound down I think there have been a series of bitters, it's hard to say exactly how it's going to wind up so I think we're couching our comments a bit. Obviously there is one bitter who is interested in the entire business, but there are folks that are interested in the piece. We're working through that right now.

[Operator:]

Your next question comes from [indiscernible]. Please go ahead.

[Unidentified Analyst:]

On the quality control and other operational improvements that you're implementing in order to trying to avoid any sort of steel or paint related issues in the future. Are there any additional costs that you anticipate either in terms of just additional time that might be required in order to screen things properly or actual dollar cost.

[Peter Duprey:]

Yes I would say you know like to inspect steel. There is additional cost to do that and you know I think in my prepared comments I said we'll do that on a sampling basis. So you know I think we're doing that just to ensure we don't have this problem again and I think it's whatever incremental cost we have it's probably good insurance to ensure that we can identify any quality issues early.

[Stephanie Kushner:]

Probably minuscule compared to all that cost we have been incurring this year to deal with these problems after the fact.

[Peter Duprey:]

Yes what you don't want to do and which is where we ended up is you don't want to find these issues on the shop floor so after you rolled it and you put time and labor in it you don't want to find out yes deal issues so that to spend a little more money on the front end to do some tests sampling I think is a prudent thing to do right.

[Unidentified Analyst:]

So going forward. What impact do you anticipate if any on margins?

[Peter Duprey:]

Nothing significant.

[Unidentified Analyst:]

And the second question. In terms of your backlog for '16 how much of the potential orders that you're looking at, the lead you have there? Do you think might be dependent on an extension of the PTC and what are your current thoughts on whether that will occur and the impact that would have in your business for next year?

[Peter Duprey:]

Yes So the volume that we're looking at for '16 I think is not dependent on the PTC because the extension that we got in 2016 as long as you complete your project by 2016 you'll get the credit. So it's really filling up that remaining capacity and then what's our outlook on the PTC I think we're still despite all the dysfunction in Washington I think we still think that PTC will get passed as either part of a tax extenders package similar to the way it was done last year what we want is a two year extension and that is the way in the Senate Finance Committee the extension was drafted so we're really just trying to find the bill to attach it to try to get that passed.

[Operator:]

[Operator Instructions]. This concludes our question and answer session. I would like to turn the conference back over to Ms. Konstantelos for any closing remarks.

[Peter Duprey:]

I will just kind of wrap it up. You know it's a tough quarter and certainly a tough year. You know as I look back I think we've certainly strengthened the business unit leadership in towers and we've implemented a number of new process controls during the year in both facilities. I think some of these lessons have been expensive, fully understand that but I believe the organization is a lot stronger than it was 18 months ago as we transition to higher volumes in more demanding customers. And then sort of reflect on the gearing business, you know they've been navigating through a very difficult time with the slow mining and oil and gas market. But I think the way they're managing their headcount and their expenses I think they're managing through that well. So you know I think this will position us well as the overall industry becomes more stable year-over-year as long term policies are implemented and I think we're really at a kind of a tipping point here where we've got the clean power plant that’s sort of a long term incentive we've got -- we’re in the midst of an extension of the PTC so as you merge those two things together you could have a very nice stable industry for the next 15 years and we're very close to that and that's the best -- this whole market industry has been over the 13 years that I've been involved in it. So I do think we're at a transition point here. We are working hard and we are improving and I think next year will be much better than this year and I thank everyone for participating in the call.

[Operator:]

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