Q3 2019 Earnings Call
Good morning, and welcome to the broad Linn Energy's third quarter 2019 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist I pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press star that too. Please note. This event is being recorded.
I would now like to turn the conference over to Jason bonds that Vice President CFO and Treasurer of Broadwind. Mr. Bond fit. Please go ahead.
Thank you Anita good morning, and welcome to broaden Energys third quarter 2019 earnings conference call with me today, our broad wins, President and CEO Stephanie Kushner.
Broadwind CEO Eric Blatchford.
This morning's earnings news release is available on our website at BW He dotcom.
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 they consider that work to be incorporated risks and uncertainties. The schools, there, including our Form 10-Q , and our form eight k. any attachments, we filed with the FCC. This morning.
We assume no obligation to update any forward looking statements or information.
Having said that I'll turn the call over to Stephanie Kushner.
Hey, Thanks, Jason Good morning.
Orders were healthy again in the third quarter, raising our quarter end, a backlog to $175 million.
Our bookings were strong in margins are firming, and we booked a record $9 million in orders for other heavy fabrication.
Distributed across a number of end markets.
Our revenue of $46.1 million was up 47% from a year ago and 12% higher sequentially.
All of our operating segments were profitable.
Our net loss per share was six cents, mainly due to interest expense and corporate overhead.
We reported EBITDA of $1.9 million just above the top end of our guidance.
We faced some significant supply chain challenges during the quarter and I'm proud of the way the team works through these challenges and met our customers' requirements.
Our liquidity improved significantly as we signaled last quarter receipts of customer deposits and conversion of steel industry inventories.
Both contributed to free cash flow generation.
At $76.5 million, our orders were up nearly fourfold from last year and exceed $205 million for the nine month period for a year to date book to Bill ratio of 1.6 time.
In addition to tower orders for 2020 production, we booked a significant order from a new customer for adapters to support a large wind Repowering project.
And we continue to add important new customers.
As we focus on expanding our production of other large industrial fabrication.
Gearing orders remained weak at $5.9 million, although up about 5% sequentially.
Having said that we are encouraged by an uptick in October with more than $4 million booked since the beginning of the month.
Process systems orders continue to improve modestly mainly due to increased demand for new gas turbine content.
I'm excited about our diversification progress.
Turning to the chart on the left recall that our objective is to continue to systematically gross sales outside of wind towers, while we manage through the cyclicality of wind tower demand.
Having said that as you can see from the wind a portion of the chart. We are in a cyclical upturn, which could be extended if the political environment is supportive.
On the right hand side, we continue to make good progress booking business from a diverse set of customers.
Through September Thirtyth, we've booked $45 million of our targeted full year $60 million.
On the next slide is a good visual of the diversification progress we've made since 2016, when our business was dominated by a single large tower customer.
As you can see from the logo is on the bottom of the page, we've developed or expanded business with a number of important to customers.
Many of whom by product now from more than one of our operating segment.
The outlook for U.S. when continues to brighten.
Wood Mackenzie has upgraded the outlook for onshore it turbot installations over the next several years.
2020, it still is projected to be a peak, but there are indications that the demand will then soften less than originally feared.
The clip we have long foreseen continues to stretch out and moderate somewhat.
Utilities continue to identify economic wind projects and coal and oil fired plants continued to be slated for retirement in favor of natural gas and renewable.
Shown on the right commercial and industrial customers bought record amounts of wind energy last year, comprising nearly half the market.
Across a wide range of industries. These customers increasingly favor renewable energy sources to meet their tower need.
On August 14th the tower manufacturing consortium received a favorable preliminary ruling in support of our request for protective tariffs and duties on tower imports.
I'm, Canada, Vietnam, Korea, and Indonesia.
We expect to preliminary duties to be established this quarter.
Although the final case will not be resolved until August of 2020.
The orders we're booking today for 2020 reflect some recovery in the low margin we've experienced in 2018 and 2019 due to the search and unfairly priced tower imports.
So while we're working hard on diversification for the longer term the medium term looks stronger for our wind tower business.
Outside of wind mining demand continues to be robust, we're seeing order growth in both gearing and for heavy fabrication supporting crushers, Shapell loaders and drill math.
For us demand from oil and gas customers is indexed.
Frac years.
Which have comprised more than $20 million of annual sales for us have been weak this year as the rapid Frac fleet growth. We experienced in 2018 has subsided and some frac fleet capacity has been idled.
During 2019, most of our Frac sales have been for aftermarket or replacement gearing.
Our frac orders have declined less than the market because we have added a major new customer, which partially offset the industry weakness.
We do expect some recovery of demand for new Frac gears in 2020, as the fleet inevitably needs refreshing.
On the other hand gas turbine demand appears to have bottomed and is maybe ticking up slightly which has been helpful for our process systems business.
Demand from steel customers has been flat to soft.
As they have curtailed capital investments in view of weaker steel prices.
And our other industrial markets have been healthy and we've added some new customers consistent with our focus on growing our custom gearbox build and repair business.
As we continue to focus on diversifying our customer and product offerings. We are completing some key systems investments to support our broader more complex sales mix.
System improvements to improve scheduling maintenance and profit by job are alive or are about to go live in our gearing and fabrications business.
In towers, we faced significant operational challenges as we raised production in a tight labor environment, where the industry supply chains are stressed.
With the impending tight tower market. It is critical that we retain our production slots.
And this has meant juggling multiple tower build and experiencing some inefficiencies and inventory build as we have had to sometimes hold more in process inventory waiting for the components for final Assembly.
This will continue in Q4 and probably beyond.
We are monitoring the economy closely the majority of our business.
Both wind towers in gas turbines are largely insulated from general economic cycle, but the remaining 30% or so of revenue can be impacted by the cycle, particularly our gearing business.
Outside of oil and gas, we've not seen any significant softening, but we are beefing up our gearbox repair offering because that service can be in greater demand in a down cycle.
Lastly earlier this year, we launched a relook at our branding and the way we go to market consistent with our diversification strategy our product offerings have broadened and we'll continue to expand as we grow we're finalizing our new look and feel and messaging and will provide details before year end. This has been a fund project and I am.
Underscores the way the business has matured in recent years.
With that I'll turn it over to Eric for some more insight on our operating segment.
Thanks, Stephanie.
Moving to our towers in heavy fabrication segment.
Orders in our wind tower product line for $56 million.
The slightly improved margins.
Due in large part to the trade case.
This follows a strong Q2 in which we booked orders of $96 million.
Quoting activity continues to be robust with customers expressing interest in capacity at both power plant.
To meet the forecasted increase in installation.
Or heavy fabrication line, which operates in mining construction marine and other industrial markets had record orders of $9 million this quarter.
Including our first order in the hydro electric space.
This particular project really demonstrates how our engineering team works with customers.
Take an innovative design and make it manufacturable.
We expect full year heavy fabrication orders for this line to exceed $20 million.
Which is impressive given that in 2015.
Our orders for the same line or less than $2 million.
We sold 243 towers sections during the quarter and 85% increase versus Q3, 2018 and up 21% sequentially.
The increase in tower volume is evident in the graph at the lower left hand side of the slide.
And we're ramping up production to meet demand.
We're pleased with our team's ability to respond this increasing volume.
And that our production flow has been less spiky in recent quarters, albeit with a varying mix of tower models.
We are proud at both our safety metrics and employee retention level continue to improve.
At our quality and delivery remain at historically high levels.
We continue to recruit great people into our plans.
And are pleased to leverage our internal Weld school to help quickly introduce our new team members to our best practices and processes.
We're making investments in both power plants to optimize production.
Of the taller towers that are becoming a greater part while the product mix in the U.S.
We have key resources focused on cost our efforts in welding machining assembly in coatings.
Even with these improvements are margins have recovered only slightly.
Due to the adverse pricing impact of imported towers.
Q3 sales were 33.8 million versus 18.8 million in Q3 2018.
Generating $1.8 million of EBITDA versus 700003rd quarter of 2018.
Looking forward to the balance of 2019, achieving up to be a stronger year than 18.
And we expect this trend to continue into 2020.
The Stephanie mentioned earlier, we were seeing some challenges in our supply chain that are stressing our production flow.
We were able to successfully mitigate those challenges.
In Q3 through lots of hard work by our team.
The supply chain challenge continues in Q4, and we're working closely with our customers and suppliers to minimize this risk to our production efficiency.
The growth of our business at both plants has resulted in commensurate increases to our workforce both in production and support positions.
We have been able to recruit and our training great people with our workforce increasing by nearly 30% since June .
But as strong labor market, we're competing for and in many cases developing internal skilled talent.
Which requires investments in both recruiting and training.
The fabrication product line continues to grow and our commercial team has been effective and expanding our customer base.
Our diversification efforts continue to bear fruit as our incoming orders reflect both new customers and new markets.
This quarter, we were able to complete some impressive products for our other heavy fabrications customers.
One such being a nearly 300 foot unloading boon for a large cargo ship.
This single Weldment was so long that is simply had to be shipped by barge.
Once again, taking advantage of or onsite deepwater port.
Additionally.
Working in concert with the city of Manitowoc, Wisconsin.
The Wisconsin Department of transportation of strategic customer and others, they have or Harbor assistant program Grant of approximately $2 million was approved.
Which will be used to upgrade the port area, allowing us to build and ship, even larger and heavier structures.
This is a definite strategic advantage for us.
Versus other fabricators in the region.
This quarter, we are going live with our computerized maintenance management system in the Abilene, Texas plant.
And we'll migrated to the Manitowoc plant shortly thereafter.
This is the same system, we deployed in our gearing business last quarter with good results.
We are adding a second high performance machining center to our manpack facility to keep up with increasing demand.
And to continue our path toward a more turnkey solution for our customers.
Preparations have begun and we expect to have this additional machine online in early 2020.
In Q4, 2019, we expect revenues to be in the $38 million to $40 million range.
Reflecting higher tower production.
With an EBITDA range of $2 million to $2.5 million.
Moving to gearing.
As stated last quarter oil and gas markets have softened recently and our incoming orders reflect that trend.
We will to $5.9 million of orders in Q3, 2019 versus 11.5 million in Q3 18.
Our but our focus on diversification continues to bear fruit as we're seeing orders coming in from the mining steel and industrial sectors.
Which partially offset the softness in oil and gas.
Our efforts to provide bundled customer solutions.
Using the combined offering a broadwind heavy fabrication gearboxes kitting and complex assemblies.
Have you will have some exciting new orders and new quote opportunities that involved at least two.
In some cases, all three of our divisions.
As you can see on the graph the highlights our revenue by market.
The reduction in revenue from the oil and gas sector.
Was partially replaced by increases in our mining steel industrial and when sectors.
It reflects the more balanced blend of customers and markets, we have been projecting.
Our efforts to grow the custom gearbox business continued to show good results.
Our gearbox revenue has grown substantially since 2016.
We expect is to continue.
In fact in response to customer interest, we're considering expanding or gearbox service and repair business to a new center in the southeast.
This would be in addition to our existing service centers in Chicago, and Pittsburgh, providing great overall regional coverage for our customers.
To support the growth in this product line, we're directing CDAI or continuous improvement efforts this quarter to improve the flow and efficiency of both our new build and service line.
Q3, 2019 revenue for our gearing business was $8 million down 20% from Q3, 18, reflecting reduced shipments to oil and gas customers. However.
EBITDA for the quarter was $1.5 million up 10% from Q3, 18, reflecting improved mix productivity and pricing realization.
This represents the fifth straight profitable quarter for this business and we're excited that this positive trend continues.
As I mentioned during our last call our improved financial results for Brett foot began in Q3 2018, so our comps and we've become more challenging.
We expect revenues in Q4 to be in the $7.5 million to $8 million range, yielding approximately $1 million of EBITDA.
Moving on the process systems.
Orders for our process systems business were 5.9 $5.1 million up 45% from Q3 2018, driving our year over year order growth of 33%.
Primarily due to increased new gas turbine content for international customer.
Diverse bookings improved slightly including three orders from the solar market.
We continue to pursue the growing solar market as we believe customers in that market will benefit from the products and services we provide.
Revenues for the process systems business were $4.3 million.
Up nearly 60% versus Q3 2018.
Electing increased order activity, primarily for new turbine installations.
The sales level, plus the price and productivity actions implemented earlier in the year.
You'll to 300000 doors of positive EBITDA for the quarter.
Versus a 400000 dollar loss in Q3 18.
Our efforts to diversify this business remain a key priority.
We will expand our position with existing customers as we press forward into new markets.
And new customers.
We are confident that our supply chain management kidding fabrication and assembly services will benefit customers outside the gas turbine business.
Our fourth quarter operating priorities include.
Continuing our customer end market diversification.
Expanding our share within existing customers by increasing the concept, we were able to provide for each of their projects such as weldments and panels.
While leveraging the capabilities of all bride when divisions to support processing modules for power applications.
We expect Q4 revenue to be in the $4 billion range with positive EBITDA.
Consistent with last quarter.
Now I'll turn it over to Jason for his comments.
Thanks, Eric.
You three consolidated sales were $46.1 million, our third consecutive quarter of sales above our 40 million our guidance, we committed to earlier this year.
Sales were up nearly 50% year over year, driven primarily by increases in tower production levels.
Our tower plant utilization has been building throughout the year driven by the industry ramp up to support the wind turbine insulation surge that is underway.
In Q3 towers plant utilization was roughly 60%.
And this will approve again in Q4.
Our focus and corresponding growth in our heavy fabrication product line.
And the recent uptick in new gas turbine content in our process systems segment more than offset the decline in gearing demand.
Growth in other markets has allowed the hearing business to partially offset lower near term demand in oil and gas.
Gross profit margins expanded to 8.7% from 4.7% in Q3 last year.
Our plant utilization continues to be an important driver of this margin expansion.
Additionally, we have taken price actions on certain product lines and have a better mix of production hearing and in process systems.
Overall, we have had improved operational performance in each of these businesses year over year.
We are managing through a temporary period of lower margin tower contracts, which are weighing on our financial performance.
These tower contracts were executed last year at a time when unfairly priced tower imports were surging into the market.
As we move into next year.
And due to the filing of the trade case, we expect margins to improve.
As you know as the majority of these lower margin tower contracts are fulfilled in Q4.
And for their efficiency efficiencies should be realized due to increases in production volume.
Operating expenses were $4.3 million during the quarter, a modest increase year over year.
Operating expense as a percent of revenue was approximately 9% during the quarter compared to 13% in the prior year.
Demonstrating our operating leverage and our focus on cost management.
Our medical insurance program costs are running below last year, which is offsetting the impact of increases in incentive compensation expenses.
Our consolidated EBITDA was $1.9 million in Q3.
Above the upper end of our guidance range, and representing a $1.7 million improvement year over year.
And all operating segments delivered operating income during the quarter.
Year to date, EBITDA was $5.5 million compared to $700000 in the prior year.
We had a 6% loss during the quarter compared to a five cent loss in the prior year quarter.
The prior year quarter did include a noncash fourteenseven gain associated with the new market tax credit loan forgiveness.
Operating working capital declined nearly $17 million during the quarter down from $22 million at the end of Q2.
To approximately $5 million.
The most significant contributor to this reduction was a collection of deposits related to contracts signed in the past four to five months.
Typically we receive these deposits four to six months in advance of production, however, customers of securing production slots earlier than normal due to the surge of 2020 installations the tight supply chain.
And the urgency to capture the full PTC benefit.
This will elevate our deposit balances.
At least the next one to two quarters.
The working capital decline also reflected a reduction of inventories of nearly $5 million during the quarter.
This was prom predominantly driven by a reduction of the pre buy steel that we have held on our balance sheet for the past four quarters.
Pre buy steel has now declined from seven and a half million dollars to foreign half million dollars.
And we are expecting can to consume the majority of the steel in Q4.
As a result inventory efficiency improved to a healthier 5.4 turns.
I'm not expecting another leg down inventory levels in Q4 as supply chain challenges typically lead to less efficient plants.
Which will most likely lead to modestly higher inventory balances.
We also expect delivery of materials to support 2020 production to outpace the drawdown of pre buy steel.
Although we are managing DSL and DPL aggressively these metrics have stabilized this year as result of more consistent production levels.
We have several customers that are now offering cash flow financing programs, which improves our DSL and allows us to borrow at their lower cost of capital.
I am expecting Dsos declined in Q4.
As a meaningful cash flow financing program is introduced.
And now expect this program to more than offset the impact of typical balance sheet management practices that we see near year end.
Due to the improvements in operating working capital our cash conversion cycle dropped 13 days from 53 days last quarter.
As a reminder, this has been an organizational focus for us over the past year and incentive compensation is partly tied to this metric.
We think this is driving the right behavior and awareness across the organization.
And as a result, this will continue to be a priority for us.
As noted on the graph on the right side of the slide Q3, operating working capital as a percent of sales.
Is the lowest we have seen since 2016.
We are in a healthy range today, and we expect that to continue into Q4 with operating working capital as a percent of sales to remain below 10%.
Moving to our balance sheet.
Our 930 balance sheet had debt and finance leases.
Of $11.5 million a.
A decrease of over $18 million sequentially.
This this expected improvement in working capital reduced our line of credit balance from $26.6 million last quarter.
To $8.7 million at 930.
We had over $19 million of liquidity under our line of credit at quarter end.
Which was an $11 million sequential improvement.
Availability under our $35 million line of credit.
Dropped to approximately $28 million at quarter end.
Due to higher deposits collected which reduce accounts receivable advance rates.
Our interest expense was $600000 in Q3.
Our average splenic credit usage throughout the quarter was notably higher.
In the surge of payments received near quarter end reduced our debt significantly.
As we received the benefit of the full quarter of reduced borrowings were expecting Q4 interest expense to dropped to three to $400000.
Again cash was near zero at quarter end.
As is receipts were applied to the line.
And this is the customary practice and is really an effective mechanism to to minimize our interest expense.
We are projecting our 2019 capital spend to be at the lower end of our guidance range closer to 2% of sales.
This reduction is mostly timing related as the delivery of the large new machining center to further support our fabrication growth objectives will slip into early 2020.
For 2020, we expect capital expenditures to fall in a modest 2% to 3% of sales range.
We have made good progress growing our fabrication product line in the past two to three years.
And we're going to continue to deploy capital to expand our competencies and fuel this key diversification initiatives.
Outside of investing in our Haven heavy fabrication product line, we expect to make targeted investments to further improve operation performance in gearing.
And investments to support the impact of evolving sizes and weights of new tower sites.
Our financial performance was as guided in Q3, despite ongoing supply chain challenges and labor constraints.
After two quarters of positive momentum in oil and orders.
We are well positioned for 2020 production.
And the margins in our backlog are firming.
We are progressing our diversification strategy and our non when business is now $65 million of annual revenues.
And we will continue and invest in processes capital and people to expand this further.
Our summary, Q4 guidance is revenue above $50 million.
And EBITDA to be approximately one half to $2 million.
Although volume is improving we will still be working through the production level of a low margin tower contract.
And we will continuing to manage through supply chain complexity and labor constraints.
Which will most likely result, and less efficient plants in Q4.
We are working to mitigate this risk.
You will provide more updates on our progress in a few months.
That concludes our prepared remarks, and I'll turn the call over the operator for the Q in a session.
Thank you we will now begin the question and answer session ask a question May Press Star then one on your touched downtown.
Hey, using a speakerphone please pick up your handset before passing the keys to his giant question. Please press Star then channel.
This time, we'll pause momentarily to assemble our roster.
First question today comes from Justin Clare with Roth Capital Partners. Please go ahead.
Hi, everyone.
Hey, just in Asia.
So I guess first.
Last couple of quarters, you've gained traction and adding new customers in the towers business as well then heavy fabrication.
I was wondering if you could just provide an update on the discussions you're having with customers and whether we could see additional customer ads in the coming quarters here, especially as.
Demand is expected to ramp up for towers generally next year.
Well just that as you know there are there are kind of four major Oems in the United States and we are talking with with all of them.
Rewards and for our capacity, we certainly expect to produce for.
Sure it leads to a likely three of those customers in in 2020 and it doesn't include.
The the work which is for the Repowering. So I I do expect us to produce for more for additional customers in Q in 2020.
Regarding have heavy fabrication death, the that's a that's a constant effort for for US. We do have kind of two people out there on tip of the spear things that are targeting the markets that we are focusing on as an example, this marine.
Our solar as best as I mentioned earlier, and so I do expect us to bring on more customers in that.
In that area, but they do start slow Justin so as we penetrate these larger these larger accounts, you'll hear us announced small orders and once we are successful what those they tend to give us more and more share of the of their production.
Okay great.
And then just on the heavy fabrication business. This business is growing nicely and becoming more important to the overall financial picture here I was wondering if you could talk about the margin profile for heavy fabrications and what that looks like as you continue to grow the business do you get.
Benefits from greater scale here.
Can you help us understand.
Sure one of the but one of the biggest benefits of heavy fab. In addition to the diversification is is the use is the use of our of our flexible workforce.
And our and our factories. So you've heard me mentioned in previous calls that we but we've been reclaiming.
Areas of our plans that were previously dedicated to storage of inventories were doing better job with managing inventory silver reclaiming parts of.
Although the plans to to actually generate revenue instead of just having having stored parts regarding to the to the margins I would say the margins are consistent.
Consistent with towers, they also kind of very.
Due to the complexity of of what they're asking us to do for instance, if it's simply a customer that just wants us to do some welding for them that tends to have a lower lower margin, but you for me mentioned I want to increase the content and as we are able to provide welding and machining and painting and assembly. It attends the it tends to not only improve our overall sales, but improve our own.
Our margins, but within those customers.
Let me just add to that I, just I think what you'll see it if you look at industry comps from from about four fabrication you'll see.
The kind of low double digit margins are that EBITDA margins are had the norm.
Not in this particular quarter and when we win when we say they're comparable to towers I would say that's towers opera cycle.
Right now down margins are quite low our heavy fab margins actually higher.
HM Okay, great. Thanks for thanks for the color there.
So then shifting to on the towers business again here.
Can you provide a bit more detail on this specific components and materials that are driving the supply chain challenges there.
I think you mentioned.
You know internal components were a problem, but any more detail.
Hello.
Yes.
Steel plate is not not the issue right now, it's really the internals and internal kits could have up upwards of two to 400 parts included in those kits in that building that may come from several.
Global distributors, so that we're managing through the delivery of those kits in a timely and efficient manner.
Typically that those parts are installed at the very end of the manufacturing process.
So what we're really focused on right now is to utilize the really finite resource that we have the that our pain boots are rollers. So we so that we don't lose production slots. So really just leads to a inefficiencies later in our production, we're able to move sections around in our facilities.
It to kind of accommodative, if we're missing parts, but it could lead to to and it has led to some delays over time when we don't have a few of parts to complete a build.
Okay.
So then considering that.
What does the risk in that.
Supply chain issues here as well as labor shortages.
Limit your ability to supply customers is there.
Potential that you may have to turned down orders because of the supply constraints or what's the risk there.
No that I think when faced with kind of say is our most scarce resource on the production side I, our paint slots, if you well and the early stage and what we're doing is managing cap rate and make sure that.
That we don't lose any of those slot.
And maybe where except in a little pain on the inventory side for holding more not fully assembled section.
And then we are meeting all of our customer requirements.
Okay, Okay great.
And then you indicated that a margins for towers in the backlog.
Improving.
Can you quantify how much improvement you're seeing and then when that's improvement will flow through the financials will that be as early as Q1 or is that more Q2 Q3 next year.
So what we think it's gradual and we're not really giving guidance for fall 2020, but we do see our tower EBITDA should be up another.
In 2 million a half dollars as soon as Q1 next year.
Okay.
And then in one one last question for me what the ongoing trade case have you seen any change in the level of tower imports at this point, whether things are being pulled forward or.
If there is a reduction due to a concern about.
Terrace being.
Implemented.
We do Justin This is Eric we do time, we do monitor that the imports tend to be spiky and they're in the reporting on them as delayed.
So in another in another month or two we should be able to see any impact but at this point, we haven't seen on the data that's available to us, which again is somewhat delayed.
Haven't seen an impact.
Okay, Alright, that's it for me thanks very much.
Thank you.
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