Broadwind, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good morning and welcome to the Broadwind Energy Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos, Director of Investor Relations. Please go ahead.

[Joni Konstantelos:]

Thank you. Good morning and welcome to Broadwind Energy’s fourth quarter and full year 2015 earnings conference call. With me today are Broadwind’s Interim President and CEO and Executive Vice President and CFO, Stephanie Kushner and Broadwind’s Vice President and Corporate Controller, Bob Rogowski. 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-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 Stephanie Kushner.

[Stephanie Kushner:]

Thanks, Joni and good morning. 2015 was a tough year for Broadwind, commercially, operationally and financially and we learned from it. The management team is aligned behind three key priorities for 2016. First, building our order book, order intake was weak in 2015. In towers, we were still living off backlog booked in 2013. And in gears, we suffered through a near freefall in orders from oil and gas customers. We are mobilized to double orders this year and have made organizational and process changes to support the goal. The wind is literally at our back with regard to the markets for wind towers and wind gearing, which we are exploiting. Our exit from the services business actually clears the path for sales of wind gearing to a larger and growing replacement gearing market. This is a big focus for us and we are seeing early results. Second, achieving consistent tower production, we learned in 2015 that our designed capacity for tower production and our practical capacity were two different things. We produced only 450 towers, although we had sold 500 and we paid dearly for this miss in cost overruns, efficiency losses and customer penalties. Where we didn’t compromise was quality, although we paid out significant sums to maintain quality and meet our customer specifications. There was clearly too much variability in our production results. The majority of our problems are in two key areas

[Operator:]

Thank you. at this time we will now begin the question-and-answer session. [Operator Instructions] Sorry go ahead.

[Stephanie Kushner:]

While we are pausing, it was just pointed out to me that when I described our paint investments, I said the total would be $75 million rather than $7.5 million. So I just wanted to clarify that. Sorry, go ahead.

[Operator:]

Our first question will come from Mark Spiegel of Stanphyl Capital.

[Stephanie Kushner:]

Hi, Mark. Mark, we are not hearing you?

[Operator:]

Mr. Spiegel, do you have your phone on mute?

[Mark Spiegel:]

I am sorry. Hi, Stephanie. I apologize. Did I hear you say that you think you can pull $8 million out of OpEx as a company or did I mishear that?

[Stephanie Kushner:]

It would be fixed overhead and OpEx. So, fixed overhead above the gross profit line and also operating expenses, yes.

[Mark Spiegel:]

So, I mean do you have a cash estimate of what that would be?

[Stephanie Kushner:]

I think $2.5 million of it is non-cash, so the balance will be cash.

[Mark Spiegel:]

And you can do that in 2015?

[Stephanie Kushner:]

In 2016.

[Mark Spiegel:]

I am sorry, 2016.

[Stephanie Kushner:]

Yes, yes. So, we had waste in 2015, some fairly sizable overruns, for example, in our – some of our operating expenses on our cash quality and maintenance and so on. So, some of those are kind of easy fixes, but we are also spending a lot of time kind of re-looking at all of our professional services, our utility costs, our property taxes, I mean everything across the board and identifying savings.

[Mark Spiegel:]

So operating expense, I am looking at your chart on Slide 7. Operating expense was $19.8 million in 2015. So, you are saying you can pull that down to something, I don’t know like $12 million, $13 million?

[Stephanie Kushner:]

Again, what you can’t see is what we are calling fixed overhead. So, the operating – the operating expense reduction will be a little bit over $3 million and then the balance of that is above the gross profit line. So, it’s things below our contribution. It’s things like our indirect labor and our property tax and our utilities.

[Mark Spiegel:]

Right. So that’s real cash – so that’s real cash expense savings then, correct?

[Stephanie Kushner:]

Yes, it’s a big part of going from a $12 million loss to there we hope profit.

[Mark Spiegel:]

Okay, fair enough. And then did you say – I just heard your correction on the paint thing, but what’s full year CapEx look like maybe you said that and I missed it?

[Stephanie Kushner:]

I didn’t say, but I think this year will be between $5.5 million and $6 million. So, it will be a little higher than we have been because of the start of this paint improvement investment.

[Mark Spiegel:]

Okay. And then you said that gearing should be around $0.5 million EBITDA negative in Q1, what happens with that later based on current revenue? I mean, is there more costs that are coming out in Q1? I mean, how do you get that to at least breakeven with revenue where it is or do you think that gearing revenue – I mean that wind gearing revenue will help it grow beyond where it is?

[Stephanie Kushner:]

Yes, I am not – our objective there is positive EBITDA this year. I am not going out a lot farther right now with my comments beyond Q1, but yes we are still making reductions and booking savings.

[Mark Spiegel:]

Okay. And then last question, you talked about $0.5 million in positive non-GAAP EBITDA in Q1, what does it look like for cash consumption in Q1, because I know you have got I guess some bigger projects you are hoping to get done and that’s going to use some cash?

[Stephanie Kushner:]

Yes. So, I think as today right now, I think we are sitting on $12 million worth of cash. We are – I think our cash balance will be down a little bit at the end of the quarter, because we are moving back into production on some towers that have slightly longer payment terms, but I think that will be in the range of – we should still be in the range of $8 million or $9 million at the end of March.

[Mark Spiegel:]

And the credit line undrawn?

[Stephanie Kushner:]

That’s correct.

[Mark Spiegel:]

Well, that’s terrific. Okay, those are my questions. Thank you very much.

[Stephanie Kushner:]

You bet.

[Operator:]

And the next question will come from Keith Rosenbloom of Cruiser Capital.

[Stephanie Kushner:]

Hi, Keith.

[Keith Rosenbloom:]

Hi, Stephanie. How are you doing?

[Stephanie Kushner:]

Good.

[Keith Rosenbloom:]

First of all, congratulations on joining the board.

[Stephanie Kushner:]

Thank you. Thank you.

[Keith Rosenbloom:]

You are welcome. Yes, echoing some of the comments that just came across, I just wanted to understand a little bit more about the balance sheet and what you guys were talking through on earnings capacity. When you said that corporate overhead last year was I think $8.1 million and $1.2 million was paid in severance to Pete, your adjusted – would that mean that adjusted EBITDA would have positive if it weren’t for those payments?

[Stephanie Kushner:]

For the year? Yes.

[Keith Rosenbloom:]

For the year of 2015?

[Stephanie Kushner:]

Yes, absolutely.

[Keith Rosenbloom:]

So, adjusted EBITDA would have been about $800,000.

[Stephanie Kushner:]

Yes, that’s correct.

[Keith Rosenbloom:]

Okay. And then you when you were walking through the remaining debt and lease obligations, you said that you think you have – because the $2.6 million that’s due at Abilene, you have under $3 million of debt and capital lease obligations?

[Stephanie Kushner:]

Yes. I mean, if you exclude that, I think we are on track to lead all the requirements for that new market tax credit. And what then happens is at the end of the 7-year term, it is a complex mechanics, but it’s essentially forgiven by really focusing on only on the other debt.

[Keith Rosenbloom:]

Are there any other financial metrics that are required to forgive that debt or do you just need to be operating in Abilene?

[Stephanie Kushner:]

Yes. You need to be operating and employing some workers and they give the stick to your current line of business. And maybe, Bob, you want – Bob is our expert on our new markets tax credit.

[Bob Rogowski:]

Yes, we are on track. It’s – there aren’t a lot of hard and fast requirements that’s keeping up with the original concept that you intended and got the money to support and we are doing that.

[Keith Rosenbloom:]

Got it. Okay. And then you called out a positive EBITDA for the first quarter on lower revenues, do you have good visibility into that first quarter EBITDA, is that something you are comfortable with?

[Stephanie Kushner:]

Yes. I mean everyday seriously, I listen to our production calls and I am excited about what I am hearing. So, it’s all about producing what we say we are going to produce everyday. And yes, that would give us any confidence.

[Keith Rosenbloom:]

Okay. So last year you booked more revenue that what you are seeing for this quarter and you had negative EBITDA in the first quarter, but this year, you think you are going to have a positive EBITDA for the first quarter?

[Stephanie Kushner:]

You might be looking at numbers with services in there.

[Keith Rosenbloom:]

Yes.

[Stephanie Kushner:]

So, yes. So, last year, we had, I think, excluding services, about $200,000 worth of EBITDA. So, I think we will be a lot better this year.

[Keith Rosenbloom:]

Got it. Okay. And then in terms of the goals that you laid out, which I thought was really helpful to understand what the goals for this year, the goal number in terms of selling out tower capacity and your slots there. In the history of the business, what’s the lowest amount of capacity that you sell during the course of the year? Has there been a year where you have not sold out tower capacity?

[Stephanie Kushner:]

Well, let’s see. I think probably there is two things. One is that if you go back far enough, we were just bringing Abilene on and we only very gradually sold that out. So, there definitely has been a trajectory, but I would have to say the only year where we had a serious shortfall was probably the end of 2012 with the exploration of the PTC. So, we had a lot of people who wanted their towers – any towers they were going to buy in 2012, they wanted by the end of the third quarter. And of course, we were racing madly to get them in by the – get them finished by the end of the third quarter, because our customers needed to get them in the ground and spinning to get their tax credit. This is why it is so the change in the PTC is so valuable now with this much longer runway, because I think it starts to eliminate some of those dysfunctional behaviors.

[Keith Rosenbloom:]

Right. And actually, the call cut out on something, when you said that your first goal was building the order book, it sort of cut out when you said double the rate, what were you saying there?

[Stephanie Kushner:]

Last year, we have booked $94 million worth of orders and we need to do to 2x that this year.

[Keith Rosenbloom:]

I see. And is that a reasonable expectation?

[Stephanie Kushner:]

Yes, I think so. We are very focused and very motivated to do that.

[Keith Rosenbloom:]

Great, okay. And if you did, if you double that backlog, that’s what’s going to I guess fill up the tower capacity, right, that towers go hand in hand?

[Stephanie Kushner:]

Yes. It will fill towers, plus it will put us in a good position at the end of next year. So I think ideally operationally, you have the most – you are probably in the best place, if you got about at least four months – somewhere between four months to six months visibility. So our target is to have a good six months visibility at year end.

[Keith Rosenbloom:]

Okay, great. And when you talked about the fixed cost lowered by $8 million, the way you guys have historically reported, you have a corporate overhead line. And that line, I think last year was the $8 million number, when you are talking about pulling – I am sorry go ahead.

[Stephanie Kushner:]

I think $8.4 million is – was the number.

[Keith Rosenbloom:]

$8.4 million and now when you are talking about pulling $8 million of fixed costs out of the business, how much of that $8.4 million will be reduced?

[Stephanie Kushner:]

Corporate should be right around $7 million. It’s kind of depending on the timing and what happens with the CEO position and also depending on incentive compensation. We are making – we have made a change in our incentive comp this year. So the financial component, which will be 80% only pays out if we have positive operating income. So if we have positive operating income, that corporate expense will probably be a little bit higher.

[Keith Rosenbloom:]

Okay. And thank you for clarifying that you are not going to spend $75 million in CapEx.

[Stephanie Kushner:]

Alright.

[Keith Rosenbloom:]

Alright. Thanks Stephanie. Good job buys.

[Stephanie Kushner:]

Thank you. Alright, thanks.

[Operator:]

[Operator Instructions] And our next question will come from Aram Fuchs of Fertilemind Capital.

[Aram Fuchs:]

Yes. It’s Aram Fuchs, Fertilemind Capital.

[Stephanie Kushner:]

Hi Aram.

[Aram Fuchs:]

Hi Stephanie, just one more question about that CapEx, $7.5 million on the paint, but then you said $5.5 million to $6 million for the year, so that means the paint CapEx will expand out into ‘17 or are you have already...?

[Stephanie Kushner:]

Yes. We are only going to do $3 million on paint this year. Its multiple phase and I think in the end we are going to have some full robotics. But to get there from here, it takes some time. We need to make sure that we are comfortable with the technology. We are going to actually be kind of expanding our painting capacity in Abilene to be able to do that and anyway, it will all stretch over certainly into ‘17 and perhaps also into ‘18.

[Aram Fuchs:]

Okay. And then just if you can look back on that contract in Abilene with very strict paint requirements, can you constructively criticize yourselves, what went wrong, it’s good to speak to customers, but in this instance, you couldn’t fulfill their order, was it sales not talking to manufacturing or how can you be confident that that problem won’t happen again?

[Stephanie Kushner:]

I think there is probably – and I am tempted to say everything went wrong, but I think I could be more focused on that. So I think part of it was, before we started up that production run, we did not have to throw a kick off, advanced planning process in place as we do now. So that’s all about understanding very, very specifically every requirement of the contract and understanding exactly how that’s going to be measured, exactly how we are going to execute to it. And even going so for as to understanding if there is a problem, if a tower goes through and it has paint spatters, what are the acceptable ways to remediate that. So it’s a pretty deep understanding of the specs and the customer requirements and the contract. And sometimes, the contract even has some ambiguity. It will talk about visual differences or visual conditions that might not be a specific issue, it would like so. In that case you have to have – you have to provide your operators with a lot more detail, a lot more training. So that was probably one area. Probably, the second area is the layout in that plant doesn’t have enough – it was setup for kind of ideal one piece flow. And I think if we were making cans of beans or something, it would be great. But the complexity at the top – tightness of the towers is installed one in the tower are tough. And we really didn’t have enough room, if we ended up having something that had to be fixed or somehow adjusted, we just didn’t have the physical space to be bale to do that. So I think that’s given us some – we are making some changes in terms of layout. Probably the third is that we are – we had a relatively less experienced workforce there. The workforce in the Manitowoc has been building towers a lot longer. We probably didn’t count well enough for the level of training difference. So that too is an area where we have made some investment.

[Aram Fuchs:]

And how do you make investments in that just send the guys from Manitowoc down to Abilene?

[Stephanie Kushner:]

Well, certainly that has been part of it. But also, we have been developing lots of good visual shop instruction.

[Aram Fuchs:]

Okay. And then I – you mentioned that working capital as a percentage of sales is coming down, what’s your latest on what you think this business should have in terms of working capital, either as a number in dollars or percent of sales, however do you think you would look at it when you want everyone to be comfortable that you have the cash to fill orders and throw off cash from each order?

[Stephanie Kushner:]

Well, that’s kind of why I show that one chart with that yellow band, that shows kind of the high and low. I think it’s because our deposits from our customers can be lumpy and because steel shipments now especially as we procuring steel from overseas in many instances, so it’s also don’t come in a nice continuous flow. So in my mind, that range from anywhere from $0.06 to $0.12 or 6% to 12% is any of that is fair game. So I want to make sure that I have got the financial wherewithal to support the company if we go to high end. I think where we were earlier in 2015 was stressful because we were up 14%, 15% and that was kind of a perfect storm environment. And obviously, that did stress our liquidity. But I try to be prepared for anything in that band. And then of course, we try and manage to the low end of that band to the extent we can.

[Aram Fuchs:]

Right. Okay. And the dollar has strengthened or – and you didn’t mention anything specifically around the [indiscernible] relationship, are you seeing competition coming from Canada or does it sort of enumerate itself if you are sourcing more steel from overseas?

[Stephanie Kushner:]

There is a little competition coming from Canada, yes. I wouldn’t say it’s huge – there is not huge capacity up there, but there is – and I think it’s triggered, certainly the exchange rate doesn’t help, but I think also there is – the political environment is not as strong for wind right out in say, Ontario.

[Aram Fuchs:]

Right. And then you mentioned gearing sold off some excess plant equipment, is that going to be hurting capacity on an upswing in demand, is that...?

[Stephanie Kushner:]

No. They are still – they still have a lot of really high quality equipment. I think that the – I think we are slowly over time kind of rebalancing or reconfiguring the equipment that we have to give us kind of greater flexibility. That probably 5 years ago all the equipment was aligned for a fairly narrow range of production and I think we have kind of made that a little more variable.

[Aram Fuchs:]

Okay, great. Thanks for your time.

[Stephanie Kushner:]

Thank you.

[Operator:]

And next we have a follow-up question from Mark Spiegel.

[Mark Spiegel:]

Yes. Hi. Thanks. Just one quick follow-up, it sounds as if corporate overhead is not coming down really from last year if you exclude the contract payoff, I mean it’s basically $7 million last year and $7 million this year. If you can find that, I don’t know, another couple of million there somehow or have you really looked at that very hard?

[Stephanie Kushner:]

Yes. We have looked at it hard. On the one hand, we paid a severance for – on the other hand, we paid no incentive compensation last year. So it’s not a big windfall. I do think we will be closer to seven or perhaps lower. I think we are – I think in the first quarter, we are on the run rate of about $1.7 million, for example.

[Mark Spiegel:]

Let me just ask you one more sort of broad philosophical question. I think it’s something that all the shareholders would like to hear. You have been at the company a long time and I am wondering as being the CFO before and not the CEO were your hands somehow tied or is this stuff you learned along the way or why now are things going – I mean you went into some specifics, but I am wondering why now with this stuff, why wasn’t this stuff done 2 years, 3 years, you see where I am getting at like why as shareholders should we believe that things are now going to really, really improve other than whatever just happens going to fall into your lap from the PTC extension?

[Stephanie Kushner:]

I think a lot of the changes have been being worked over a quite a long period of time. And I will give for example, on the systems side. Early days, we had very, very weak disparate systems with – although we had ERP systems replace people, we are doing things on spreadsheets and just much more ad hoc. And it’s been a pretty long slog to get to the point where we are getting good real-time information. We are introducing things like tablets for our quality guys in the – on the plant floor and towers to collect data real-time. We have to provide 20 – 200 and some odd important quality data points to our customers, for example. And we were doing all that manually. So there has been a lot of the improvements, I have to say on the systems side which accumulate and have been positive. We started continuous improvement probably a couple – 2 years, maybe 2.5 years ago, but we have got a very strong CI team now and we are pushing this whole APQP, advanced product quality planning process. That training was happening late last year, early this year, and it’s taking hold. So – and I expect a lot of the changes in the organization and the upgrading and the staffing also has taken some time to get in place. So I feel like we are getting some momentum on those things. And that we have a good market and we have a – we are crawling out of a deep hole, so we think there is going to be some significant improvement.

[Mark Spiegel:]

Okay. Thank you very much. Good luck.

[Stephanie Kushner:]

Thanks.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks.

[Stephanie Kushner:]

Thanks. Yes. Thanks for the good questions. I would just say in closing, I am really excited about 2016. We were seriously bruised in 2015, but we have recovered. And we have made and we are still making some permanent changes to prevent a recurrence. The towers team is working together very well. I can tell from our daily production calls that they have hit a rhythm. And more importantly, as obstacles appear, they are dealing with them and moving on. And even better, I am seeing anticipating and removing obstacles before they become a problem. In gearing, we faced a tough market and we are hunkering down on the expense side while we are growing in the markets that are open to us. We do have world class machinery and skilled employees that we need to increase the utilization on both of them. We are managing our expenses aggressively and finding ways to make cost reductions without limiting our future opportunities. So I think – I mean in short, I think the market will soon appreciate that the stock has been oversold, currently trading just slightly above some of our cash plus our net working capital with almost zero value being given to more than $50 million with the fixed assets and machinery and $200 million worth of NOL. So thanks for your interest. And I hope – I look forward to reporting our first quarter results in late April. Thank you.

[Operator:]

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