Q1 2020 Earnings Call
[music].
Greetings welcome to the Broadwind first quarter 2020 result conference call.
This time, all participants aren't any listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operators. This is during the conference. Please press start zero on your telephone keypad. Please note. This conference is being recorded Oh now turn the conference over to your hosts <unk> Yeah cool.
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Good morning, and welcome to the broad when the first quarter 2020 results conference call.
We didn't the call today is R.C.E.L., Eric Blatchford, and I'm, Jason Pond fit the company's C.F. off.
Issued a press release before market open today detailing our first quarter results.
I would like to remind you that management's commentary and responses to questions. On today's conference call May include forward looking statements, which by their nature are uncertain and outside of the company's control.
Although all these forward looking statements are based on management's current expectations and beliefs.
Actual results may differ materially.
For discussion of some of the factors that could cause actual results to differ.
Use refer to the respect your section of our latest annual and quarterly filings with the S.C.C.
Additionally, please note that you can find reconciliation so the historical non gap financial measures disgusting or call in the press release issued today.
At the conclusion of our prepared remarks, you will open the line for questions.
With that altering the call over to Eric.
Thank you Jason.
Welcome to those joining us today.
But a matter of a few short months.
<unk> Oh Cobin 19 has emerged.
One of the most consequential public health crises in modern history.
Disrupting global economic activity in ways that remain yet to be fully understood.
In the midst of this crisis.
We've witnessed uncommon courage.
Professionals risking their personal well being for the greater good.
People committed to going above and beyond to ensure the health and safety of their communities.
So that and.
I'd like to take a moment to recognize and thing.
All of the first responders the medical professionals essential workers in factories transportation grocery infrastructure and somebody others.
You are doing amazing work into communities in which we work and live.
You're a broad when I'm incredibly proud of our workforce.
Continue to perform admirably in spite of challenging circumstances.
We are grateful for you can appreciate your continued efforts.
Burning to slide for the conference call presentation.
As for our response to the Kobe 19 pandemic.
Closely monitoring the potential impact of the virus.
The operations customers and supply chain.
In response to the virus.
We've adopted all necessary inappropriate protocols as recommended by the U.S. centers for disease control and prevention.
To ensure that continued wellbeing of our boys.
Given that all of our businesses are considered central in critical infrastructure.
That's defined by the U.S. Department of Homeland security, our facilities remain open and operational.
Should it become necessary.
We are prepared to an act of business continuity plan to ensure that continued production and shipment of products to meet our customers needs.
We applied for and received a loan.
As part of the S.B.A.P.P.P. program.
Given our status as a small company employer.
This long was necessary to protect our valued employees.
All of them are based here in the U.S.
During a time of significant economic uncertainty caused by the virus.
We conducted various stress test scenarios in each of our businesses following the cope in 19 outbreak.
Well it is difficult to quantify the full intact at the virus on our business and then markets. At this time, we anticipate the current availability onto our credit line and the proceeds from the P.P.P. loan.
Provide adequate liquidity to support our business during this period of uncertainty.
Turning out to our first quarter result on slides five and six.
Regenerated net income $1 million were six cents per share.
Representing a year over year increase up $2 million.
First profitable quarter since 2017.
Revenue increase 17% you every year to $48.6 million due to approve demand from our customers in the wind mining and gas turban Marcus.
When the industry sales increased by more than $9.2 million versus the first quarter of 2019.
But tower volumes.
Section volumes up 66%.
Improved to plant utilization in operating efficiency supported your of Europe.
Improvements in gross margin and operating margin.
420 basis points, and 470 basis points respectively.
Our first quarter, you, but was $3.6 million increase of $1.9 million over the prior year period.
Our total backlog increased 57%.
From the first quarter 20, $19 million to $127.4 million, primarily due to the wind tower and industrial fabrications product by.
Orders in the first quarter were three $3.8 million, an increase of 41% your every year.
During segment orders were up $5.3 million, you every year to $12.4 million and heavy fabrications orders were up $3 million year over year to $15.5 million.
I'm pleased to report that our customer and market diversification efforts are progressing as planned.
The addition of a new window.
Customer list this year.
With this customer addition, we now serve three up the top for global wind turban <unk> in the U.S. market.
But this time or mining and gas turban and markets also remained strong.
Turning to a deeper dive into our segment performance.
Heavy fabrications revenue increase by 36% your every year.
Supported by an acceleration in when tower demand and increase diversification.
For the for your 2020, we know more than 80 per cent number 2020 tower production capacity in backlog.
Gearing revenue dropped by 38 per cent. Your every year, primarily due to customers in the oil and gas market.
<unk> from March.
Until the second half of 2020 in response at least in part.
To cope with 19 impacts on their businesses.
We are currently taking actions to align our gear segment cost structure with the current demand environment.
Industrial solutions revenue was up 21% and the first quarter when compared to the prior year period supported by increased penetration of both new and existing customer accounts consistent with their ongoing diversification strategy.
Most of the year over year growth in revenue within this segment continues to be driven.
By strong demand and the natural gas turban market.
We had total cash out $3 million and availability under a line of credit or $16 million as of March 31st 2020.
At this time, we have to for all merit increases reduced to compensation for all executives and a board of directors.
Further reducing working capital and discretionary investments.
Given current market uncertainty.
You remain focused on conservative liquidity to maintain continued balance sheet optionality.
As I indicated that the outfit at the call.
The full applications of the coven 19 pandemic on our customers supply chain and operations cannot yet be fully qualified.
To that and we have chosen to withdraw are for your financial guidance issued in February 2020.
We continue to monitor the situation at work closely with our customers and suppliers to probably respond to business opportunities that they arise.
Although we had strong.
First quarter performance and remained focused on delivering a strong for your performance.
Currency market conditions warrant conservatism.
How's the economy reopens over the coming weeks and months.
And we have a better sense. This is the pool implications of the crisis on our business.
We will look to reinstate formal guidance, but.
With that I'll have to call over to Jason for a financial review of our first quarter results.
Thank you <unk> and good morning.
As expected, we delivered strong first quarter performance.
Resulting in our first profitable quarter since 2017.
Although significant uncertainty remains evident in our markets.
Encouraged by the operational and commercial progress achieved during the past year.
Together with the improved T.T.M. trend <unk> generation at current production levels.
First quarter consolidated sales were for $48.6 million up from $41.7 million in the prior your quarter.
Due primarily to improved plant utilization.
In our heavy fabrication segment.
Which benefited from increased tower demand.
Demand for when towers.
Fabrications for mining equipment, and gas turban components more than offset weakness and gearing demand.
R.T.T.M. consolidated sales were more than $185 million x. sitting in the first quarter.
Versus $137 million and the prior year period.
As before their diversify our customer and market exposure.
We experienced significant margin expansion during the first quarter with crooks gross margins, reaching 12.7%.
From 8.5% in the prior your quarter.
Due primarily to improved operating leverage specifically in our heavy fabrication segment.
We continue to aggressively reduce operating expenses as a per cent of sales.
In the first quarter operating expenses is percent sales was 9.2% and below our long term target of 10%.
And we expect to match operating expenses near these levels throughout 2020.
We generated $3.6 million, if you put die in the first quarter.
An increase of $1.9 million versus the prior year period.
On a T.T.M. basis.
We have generated $9.1 million fee, but <unk>.
A significant improvement with them when compared with our performance in the previous 12 month period.
Turning to slides eight and nine for discussion of our heavy fabrication segment.
First quarter sales were $38.4 million, a 10 million dollar increase on a year over year basis.
Only due to increased demand as the industry ramps up activity levels to support higher expected U.S. wind turbine installations.
As Eric noted earlier.
Continue to experience possible moment momentum in our order book.
First quarter orders were $15.5 million, an increase of $3 million versus the prior year period.
During the first quarter, you booked $8.5 million of industrial fabrication orders, a 2.7 book to Bill ratio.
While continuing to see strong activity in the mining and material handling markets.
On a T.T.M. basis. This product line has booked over $25 million borders compared to just several million a few years ago.
Zierke mentioned earlier, we booked a new tower O.U.M. customer in the first quarter.
Which represents another nice when from a diversification standpoint.
As a result of the timing of tower orders that we expect a book in the second quarter.
Are backlog declined to $97.4 million sequentially.
We are encouraged by our conversations on other tower orders and expect to fill additional 2020 capacity and the next few months.
Following Q1, we booked at 19 million dollar order for towers to be produced in Q. for in early 2021.
However, in our industrial fabrications product line.
We have seen a meaningful decline in order since the end of Q1.
Partly due to general market uncertainty.
And the other component as timing related as customers booked larger orders and Q1.
We remain confident in or backlog and to date have not seen customers delay or cancel orders.
Our full year financial performance will likely depend on our relatives to relative stability of our supply chain.
Our ability to maintain production at our plants.
And the number of production thoughts were able to sell in the fourth quarter of this year.
Turning to slide nine.
We sold over 300 and sections in the quarter with six unique tower designs produced translating into operating above 75 per cent plant utilization.
Compared to approximately 50 per cent in the prior year quarter.
We were encouraged.
By the ability of the team demands through multiple tower designs.
During a period impacted by delays within our supply chain.
As a result of for operating leverage.
Segment, EBIT die improved to $4.5 million.
From $1.1 million in the prior year.
First quarter segment, <unk> expanded to near 12%.
Which are much much healthier on a both a year to year over year and sequential basis.
Turning to slide 10.
For discussion on gearing.
Are gearing segment orders increase to $12.4 million from $7.1 million and the prior quarter.
And up from averaging $6 million over the past three quarters.
We recorded a 4 million dollar order for wind aftermarket gearing.
This demand is typically lumpy and his place by our customers reserve future capacity.
Additionally, we had strengthen oil and gas steel and mining markets.
Book to Bill was two point no one the quarter, resulting in an increase in our backlog to $20.5 million.
Up from to $14.3 million at 12 31 2019.
Roughly 80 per cent of this backlog has schedule delivery dates in the current year.
What's that sad order activity declined rapidly following the cold, but 19 outbreak.
Together with the recent collapse and all prices.
We have seen this through the delay of new orders and to for delivery schedule backlog into the second half.
We expect oil and gas gearing demand to be weak in the near to medium term.
And are focusing our sales efforts towards <unk> alternative markets.
We have and will continue to pursue costs sections that right size our costs structure.
To align with had dissipated demand levels.
First quarter segments sales declined to $6.2 million from $10 million in the prior year.
Which was well below our previous estimate as oil and gas customers suffered more than $1 million a schedule purchases to later in the current year.
Although sales declined to the lowest level since 2017.
The business continued to generate positive <unk>.
Turning to slide 11 for discussion of our industrial solutions segment.
First quarter segments sales increase to $4 million from $3.3 million in the prior year, mostly driven by hire new gas turban content.
And from our diversification efforts.
First quarter, you, but improved to $300000 from a small lost in the prior year.
As a result of effective cost management the business has improved its operating leverage resulting in T.T.M. <unk>, it's approaching $1 million.
Industrial solutions recorded the highest quarterly order volume since it's acquisition in early 2017.
First quarter orders increased to $5.9 million from $4.4 million and the prior your quarter.
Segment book to Bill ratio was 1.5 to one.
We are continuing to see strengthen orders for natural gas turban content.
2019 was a strong year for the gas German industry and a recovery in our primary customers market share.
Borders into our business like our customers Turban awards by several quarters.
As the remainder up the supply chain and timing of projects are determined.
Importantly, we're seeing continued traction with both new and existing terminal young customers.
As a result, T.T.M. segment orders are approximately $18 million.
<unk> up roughly 25% over there prior year period.
When backlog, it's up to $9.5 million or $1.8 million sequentially.
With the majority of the scheduled for delivery in 2020.
Falling up strong first quarter orders are down slightly in April.
Given covert 19 related delays.
Turning to slide 12.
At March 31st 2020, operating working capital was $8.8 million or 4.5% sales a comfortable range when compared to historical performance.
Cash conversion declined to 21 days in the first quarter compared to 28 days on average in 2019.
Or D.S.. So declined slightly just 30 days from 34 days a year round due to continued focus on receivables management.
And we are continuing to monitor air carefully for signs of customer distress.
Inventory balances increased to $40 million.
Result of the timing of steel deliveries to support the second quarter production and the impact of several customers delaying purchases.
As a result, <unk> increase to 88 days and Q1 versus 64 days at year end 2019.
We expect inventory turns to improve gradually throughout the year.
Barring any further impacts from coping 19.
While customer deposit balances were flat sequentially at $23 million.
Remains a positive story as demand for towers remained strong and customers are securing production slots.
Total cashing liquidity remained flat sequentially at $19 million.
And continues to be well above 2018 levels.
We had $14 million drawn under our 35 million dollar credit facility.
And had $2.7 million of cash on her balance sheet.
That concludes my remarks.
We'll turn the call back over to Eric for an overview of conditions within our end markets.
In addition to some concluding remarks.
Thanks, Jason.
Despite the challenges we all face since early March or leadership team has continued to execute on the strategic priorities me first introduced last quarter.
Which include targeted expansion into both are like a c. when markets as well as not when sectors.
As before.
You remain discipline that are pursuit of opportunities, where our unique value proposition and proven industry experience position us to win.
Turning to slide 14, 15 for <unk> review of demand conditions within each other six and markets me Sir.
Let's begin with the wind sector.
Which represented approximately 68% of TTM revenue.
Yeah I'll look for this sector continues to be positive.
Driven by various economic forces such as the P.T.C.
Recently announced one year extension.
The competitiveness of wind power versus other sources.
And the nation's desire for clean energy.
Well underlying demand conditions continues to support it positive outlook for this sector over.
Over a multi year period, our customers acknowledge that some projects scuttled for this year could be delayed due to the pandemic.
And 2020, we expect that nearly 15 gigawatts a wind power will be installed in the U.S. This year I.
Significant achievement.
However, this is 500 megawatts or 3% below previous predictions.
Acknowledgement by forecasters potential project delays.
Furthermore, tax equity and other forms of financing remain available on projects.
Looking ahead, when Mckenzie continues to forecast significant near term string for on for installation through 2021 with growing demand any out years after the P.T.C. term.
From that combined installations that both onshore and offshore turbans.
Long term projection include 19, gigabaud the offer installations.
<unk> <unk> <unk> <unk> prior forecast.
Although some projects have moved to the right of the forecast the industry still expects 2023, there'd be a strong year for offshore wind development.
Yeah.
We generated 6% over TTM revenue from the industrial sector.
Which has an outlook of positive to neutral.
Much of a revenue in this sector comes from customers in the material in material handling.
Ultimate end users into fence and other vital applications, which are less cyclical.
Or deep water port and Mansbach, Wisconsin, heavy lifting capacity very large paint booze and unique manufacturing capabilities.
Including the large machining center, we added early and Q1 <unk>.
Continue to drive strong customer interest.
Eight per cent of TTM revenue.
For the power generation sector.
Where we see positive demand outlook, our primary customer is regaining shear.
We've expanded our customer base and now provide content for each of the top three oh, yeah in the new gas turban space.
The mining sector drove approximately 10% of T.T.M. revenue.
And our customers for Puerto neutral outlook.
Overall, we had strong orders in Q1 from this sector.
That's awesome weakening latent you one.
Which has extended into cute too.
The oil and gas sector, which comprise six per cent of our TTM revenue.
I've seen a significant decline and demand as <unk> economics, that'd become less attractive, but the recent pull back and crude oil prices.
The outlook for this sector is negative.
With customers differing shipments a new orders.
As North American fried plates are taken off line in customers are quickly cutting cat backs in response to the current market dynamics.
Construction drove about 2% of T.T.M. revenue.
And we see the outlook for this segment negative in the near term.
However, if the government introduces infrastructure spending into an upcoming stimulus baggage.
That would be a definite catalyst for this for the segments.
Turning to slide 16.
Or key initiatives for bride would remain consistent.
As our near and medium term strategy for the business remains unchanged in spite of the challenges a covert 19.
And the heavy fabrications segment, we are working to sell the remaining 2020 tower capacity.
We continue to expand our customer base.
We were prudently add production capabilities and upgrade systems to maximize throughput and profitability.
We're developing a strategy to address the upcoming demand for opt for when towers.
Continue to grow and diversify or industrial fabrication customer base.
We will strengthen our engineering and supply chain organization to support our expanding market opportunities and execute or continuous improvement actions to ensure or zero defect quality program.
And the gearing segment, we remain focused on accelerating our efforts toward the end market diversification.
Leveraging our specialized engineering and sales team.
Further we intend to grow or custom gearbox business and expand our servicemen repair offering geographically.
Last quarter.
Lastly, we need to leverage the system improvements, we've made over the last ever quarters to improve our throughput coding efficiency equality and profitability.
With regard to our industrial solutions segments.
We continue to primarily focused on our core product line of new guys turbans and the after market for those turbans.
As expand our customer base in that line.
We continue to pursue the solar energy installation market.
As we see it as a large untapped opportunity for us.
And we will average by one's overall engineering and business development resources to identify and serve you market opportunities.
Especially those which leverage to combine the manufacturing power of all of our division.
As for our investment thesis.
Diversify precision manufacturer serving clean tech in industrial applications.
Or heritage isn't it into renewable sector.
Which requires very precise manufacturing in handling of large heavy components.
But our future includes not only renewables, but also mining how're generation material handling construction oil and gas and other industrial applications.
We're executing him multi your diversification plan to leverage or core process capabilities and the other markets.
And I've achieved revenues of nearly $65 million outside it when.
Even at even as we improve our customer concentration within one.
Or backlog is up 57 per cent. Your every year, reaching $127 million ordered both remains strong across our key and markets.
The extension of the P.D.C. for a six year.
Favorable preliminary trade case findings provide a catalyst for growth in our heavy fabrications segment.
Thank you for your interest we look forward to providing updates throughout the year as our business navigate through this period of uncertainty but.
But that said I'll turn they call over to the moderator.
Session.
At this time, we will be conducting a question and answer session. If you would like to ask the question. Please <unk> star one on your telephone keypad, a confirmation cone indicate your line is in the question cute you may priced aren't too if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your hands it before person to start keys.
Won't be pleased while we pull for questions.
I'm a first question is from Justin clear.
Well off capital partners pleased to see what's your question.
Hi, everyone. Thanks for taking my questions.
Morning adjusted.
Hey, So I guess I I wanted to start out.
Seven Q1, you're applying utilization with the highest level since 2017, despite the disruptions caused by the crowing virus here.
I was wondering if you could qualify you know how much you're margins may have been impacted in the quarter by the disruption and you know what.
Couldn't margins have been in a more normalized environment.
Sure not not a significant impact from the corner virus in Q1, just because of all the the stay at home waters came in in Bury the back end to the quarter.
What I would say is we had continued to have supply chain I guess, you know delivery issues that that impact production.
And then we also had six different tower designs going through the plan so that always crates. Some some destruction as you get as as you, bringing new tower design time, you go through that learning curve.
I I would say that's approximately I think we lost a one to two margin points based on on some of this destruction. So.
Looking at our gross margins for the quarter, we still had near record gross margins at 12.7% for further consolidated business.
I I think there was you know so clearly we look at an optimize corridor <unk>, maybe you're into the the mid teens for gross margins.
Okay, Great. That's that's really helpful.
And then you know I I know, there's a lot of uncertainty Hill, but you know looking into the queue to given the different you know safety measures that if you have taken then and the disruption that you've seen how would you anticipate margins trending <unk>. There are enough for that I had when there were going to.
See a decline sequentially.
I think in the in the heavy fabrication business. We know we're you know it must have we have any major disruption your towards you know the quarter I would expect that to be about in line I I would expect continued pressure in our gearing business just because of reduced ball.
In some and you know frankly, some uncertainty with a customer off taking cute too.
Okay got it.
And then you've talked about you know you're you're planning to fill additional 2020 capacity for for the tower business in the coming months here you know what is the potential that you could actually get too you know booking 100 per cent of the capacity.
And then you know do you have the ability to actually deliver all of the towers. If you were to reach that level you know given the the.
Potential supply chain constraints, and and potential issues with <unk> production, but you know maybe could have I'd.
Adjust and this is Eric Thanks for the question. Yeah. This point, you know supply chain <unk> within the the tower specifically the tower power business can be anywhere between.
I'm 20 to 26 weeks, even a little bit shorter in some cases, the the supply chain around the world is starting to come back up.
But there are certainly there certainly is is a rich just justin on on that supply chain.
But as as a as a reminder, due to the the trunk terrorist put in a couple of years ago that supply chain has become very diversified around the world. So his code it impacts a normal parts of the usual parts of the world other parts of the world become.
<unk> become become opened up so without diversity of the supply chain.
As long as we get the orders here within the next.
I would say two or two or three months hopefully shorter than that we should be able to fill that hole that capacity.
At the end at the end of this at the end of this year.
Okay, Great and then you know you you've had success in cookware diversification, you're now serving the top three when Oh, yeah, because in the U.S.
So just wondering you know based on the discussion with your having with those customers can we anticipate you know <unk> orders from all Green you know given that you know demand is as strong this year shouldn't be strong next year what are your expectations there.
Well, we're certainly excited to be dealing with those those three of the four and they all have projects, they're talking with with <unk> adjusting it really depends on where where they when they're projects and when they when they're projects depending on how that how that balances with our open capacity. Yeah. I do expect that we should be able to we should be.
And all three of those customers yet again.
I'm 21.
Okay, and then maybe just one one last one for me you know for the tower order that you're you're recently booking.
How was the pricing and unexpected margins Oh.
<unk>.
Are we seeing you know kind of flat <unk> relative to you know what you saw on Q1 or or has there been any meaningful change there.
I think the best we can share is.
If you look at Q1 versus queue for have you fabrication business. There was there was a nice improvement in <unk> a lot of that was driven by frankly by the tower price and and I think I think for now I would hold the the assumption that.
Holding the whole Q1 pricing assumptions constant throughout the year.
I think I think it's always you think it's always a challenge to to to talk through that as we're dealing with these supplied should change constraints and introducing you'd tell her models that always just puts pressure or can put pressure on margins.
Right, Yeah, it's understandable, okay that that does it for me to sex or the question.
Thank you just.
And we have reached the editor question enhances session you know now turn to call.
But over too.
<unk> for any according remarks.
Yeah. Okay. This is Eric I'll, just put some closing remarks and again. Thank you for your interest in broad when.
No. This is crazy timer, all going through but we remain committed to our people our customers aren't in our.
Communities are excited about her business and our strategy and look for updating you want our performance in July.
You very much.
This is conclusive news conference and Humane 'cause connection line at this time. Thank you for your participation.