Q2 2020 Broadwind Inc Earnings Call
Greetings and welcome to broad one second quarter 2020 results conference call.
All participants are in listen only mode. A question answer session will follow the formal presentation, depending what <unk> operator systems. During the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I would now like turn the converts over to your hosts Jason Butler.
What's chief Financial Officer. Thank you you may begin.
Good morning, and welcome to the broad when second quarter 2020 results conference call. During the call today is our CEO, Eric Blackbird and I'm, Jason bonds at the company's CFO.
We issued a press release before the market open today detailing our second quarter results.
I would like to remind you that managements commentary and responses to questions on today's conference call May include forward looking statements.
By their nature are uncertain and outside of the company's control.
Although these forward looking statements are based on managements current expectations and beliefs actual results may differ materially.
For discussion of some of the risk factors that could cause actual results to differ.
Please refer to the risk factor section of our latest annual and quarterly filings with the FCC.
Additionally, please note that you can find reconciliations of historical non-GAAP financial measures discussed during our call in the press release issued today.
At the conclusion of our prepared remarks, well open the line for questions with that I'll turn the call over to Eric.
Thanks, Jason.
Welcome to so those joining us today.
Despite continued macro uncertainty.
Well they did to the Coca 19 pandemic, our business performed well during the second quarter.
Guided by our long term focused on end market diversification lean manufacturing processes.
Disciplined capital management.
This strong performance was supported by broad based revenue growth across our core wind industrials steel and natural gas turbine markets during the period.
Let's begin on slide four and five.
We generated net income of half million dollars worth three cents, a share representing a year over year increase up $1.5 billion and our second consecutive quarter of profitability.
Revenue increased 33% year over year to $54.9 million.
Driven by demand from our when customers together with customers and multiple not when markets.
Wind industry sales increased by more than $11 million versus the second quarter 2019.
Power section volumes up approximately 60% year over year.
To the highest levels, we've seen since early 2017.
Improved plant utilization and operating efficiency supported year over year improvements in both growth <unk> gross margin and operating margin of 40, and 240 basis points respectively.
Our second quarter, EBITDA was $2.9 million, an increase of $1 million over the prior year period.
Our total backlog decreased <unk> percent sequentially to $112 million.
Due to the timing of customer orders, which were delayed by cobot 19.
Oh boy oil and gas customers have delayed scheduled deliveries into the second half.
And we expect this market will remain challenged.
In the near to medium term.
I was encouraged by the team's ability to work through the cobot 19 related restrictions and supply chain challenge is evident throughout the quarter.
Positioning us to produce several new wind tower models for both new and existing customers.
Worse in the second quarter were $40 million, an increase of 17% sequentially. That's strengthen the heavy fabrication orders offset softness in gearing segment orders.
Have you fabrication orders were $31 million doubling sequentially.
Looking forward to the full year 2020, we now have about 90% of our 2020 tower production capacity in backlog.
Gearing orders were $3.7 million down 33% versus the prior year.
Reflecting the cobot 19 impacted softness in a diverse markets we serve.
Orders in our industrial solutions segment, which primarily serves the natural gas turbine market.
Continued the positive trend we saw last quarter posting order is a $4.4 million an increase over Q2 2019 I was 63%.
Turning to a discussion over segment level performance.
Have you fabrications revenue was $43.6 million, an increase of 50% year over year.
Supported by an acceleration in wind power demand an increased diversification.
We had $6 million revenue from our industrial fabrications product line.
As we execute against our long term diversification strategy.
Hearing revenue fell by 25% year over year due to a general pause, a new customer orders and weakness in oil and gas markets.
Kobin 19 impacted our customers project timing and their capital investments.
We're currently taking action to align are gearing segment cost structure with a current demand environment.
Putting workforce reductions and a hold on capex.
Industrial solutions revenue was up 50% in the second quarter when compared to the prior year period.
Supported by increased penetration of both new and existing customer accounts consistent with our ongoing diversification strategy.
Most of the year over year growth in revenue within this segment continues to be driven by strong demand in the natural gas turbine market.
We had total cash of $2 million and availability of nearly $20 million under our credit line as of June Thirtyth.
We're continuing to manage cash prudently with tight controls over discretionary spend and capital investments.
Given current market uncertainty, we remain focused on preserving liquidity to maintain continued balance sheet optionality.
As I indicated that the outside of the call before implications of the cobot 19 pandemic on our customer supply chain.
And operations are not yet now.
To that end, we've chosen not to reinstate or fool your financial guidance at this time.
We continue to monitor the situation and recruit work closely with their customers and suppliers the property respond to business opportunities as they arise.
With that I'll hand, the call over to Jason for financial overview over second quarter results.
Thank you here.
As expected, we delivered our second consecutive profitable quarter in Q2.
We generated net income of a half a million dollars or three cents per share.
Significant year over year revenue gross profit and EBITDA improvements.
Second quarter consolidated sales were $54.9 million up from $41.2 million in the prior quarter.
Strong quarter, notwithstanding Corbin 19 challenges.
The increase was driven by improved plant utilization in our heavy fabrication segment, which benefited from increased tower and industrial fabrication demand.
Our trailing 12 month consolidated sales approach your run rate of 200 million Dollarss exiting the second quarter.
Which now includes $65 million of non wind revenue.
Since launching our revenue diversification initiative, we've made significant progress into non wind end markets and continued to focus building that book of business.
The combination of increased wind tower demand, coupled with broad based customer expansion across multiple end markets contribute to sick significant year over year growth in the period.
Compared to the prior year quarter gross margins expanded 40 basis points to 9.9%.
This continued margin expansion reflects the impact of the improved operating leverage resulting from higher have you fabrication plant utilization.
And this benefit was partially offset by lower demand levels in our gearing business.
Given the challenges we are seeing in the oil and gas and other cyclical markets impacted by corporate 19.
Gross margin declined sequentially in the second quarter.
Primarily due to higher material content in the current quarter.
Together with lower operating levels are gearing segment.
Operating expenses as a percent of sales was 8% and below our long term target of 10%.
Primarily due to the improved plant utilization I mentioned earlier.
Effective cost management.
And higher material content on their product mix sold.
We are prudently managing operating expenses as evidenced by a 7% increase year over year.
On a 33% revenue increase.
Interest expense declined to $500000 from $800000 in the prior quarter.
Due to lower debt levels.
We generated $2.9 million EBITDA in the second quarter, an increase of $1 million versus the prior year period.
On a trailing 12 month basis.
We've generated $10.1 million of EBITDA, a significant improvement when compared with the performance in the previous 12 month period.
Turning to slide seven and eight for discussion of our heavy fabrication segment.
Second quarter sales were $43.6 million, 50% increase on a year over year basis.
Primarily due to increased demand as the industry ramps up activity levels to support higher expected U.S. turban installations.
Additionally, we shipped nearly $6 million of industrial fabrications in the quarter up from less than $3 million in the prior year quarter.
This business has traditionally served construction and mining markets. However, our diversification efforts are progressing.
As we are beginning to leverage our deepwater port imagine Twok, Wisconsin.
To sell into material handling and other industrial markets.
Second quarter orders were $31.4 million compared to $96.3 million in the prior year quarter.
Prior year order levels, where normally high as turbine Oems were securing capacity well in advance of historical lead times.
Due to expectations of surging wind tower installations in 2020.
During the second quarter, we booked approximately $30 million of new tower orders.
Our backlog Dol provides visibility 90% of our full year optimal tower production capacity.
Orders in the industrial fabrication product line declined immediately following the call, but 19 pandemic as customers delayed capex and inventory purchases.
In this recessionary environment.
We are encouraged by the status of our conversations with our tower customers to sell 2021 production slots.
However, we did see lower than expected tower orders in Q2, resulting from various cope at 19 impacts.
Including permitting delays.
And tax equity challenges.
To that and we expect lower production levels in the fourth quarter 2020.
We sold 320 sections in the quarter, our third consecutive quarter in which we have sold more than 300 towers sections.
To support this level of demand our tower plants operated near peak utilization during the second quarter compared to approximately 60% and the prior year quarter.
Average selling prices per unit were higher in the quarter, primarily driven by increased material content, which is typically a pass through to customers.
Together with the benefit associated with the production of more complex tower designs.
Given the strong operating leverage segment, EBITDA improved to $4.2 million from $1.5 million in the prior year.
Second quarter segment, EBITDA margins were 9.6% much healthier on a year over year basis, but were down sequentially as Q1 benefited from lower material content on the product mix sold.
Less complex tower designs.
And the operating leverage achieved from the production of a tower adapter order in Q1.
Turning to slide nine are gearing segment gearing segment orders declined from $5.6 million in the prior quarter to $3.7 million.
Orders in Q2 declined sequentially with an almost immediate reduction and customer activity. Following the call that 19 pandemic and from lower oil prices.
Our backlog was $17.4 million as a 630 flat on a year over year basis.
Within oil and gas markets U.S. based frac and rig counts continue to weaken.
Should commodity prices remain at depressed levels, we anticipate further cannibalization of existing Frac fleet equipment.
Which would route reduced demand for our products.
As the global oil and gas markets rationalize excess production capacity, we could see some level of recovery in the market over the medium term similar to prior cycles.
Although our expectations are that these markets will remain unchanged.
And challenged.
To that and we'll continue to focus our commercial efforts on these other markets.
Second quarter segment sales declined to $6.9 million from $9.3 million and the prior year.
Oil and gas customers to for nearly $2 million is scheduled purchases to the second half of 2020.
As a result at the operating leverage profile the business the reduction in sales resulted in the small EBITDA loss during the quarter.
We have and will continue to take action to preserve margins and cash.
Including Rightsizing labor and deferring capital purchases.
Well, we are in this challenging environment.
Turning to slide 10 for a discussion of our industrial solutions segment.
Industrial solutions recorded $4.4 million, some new orders in Q2 up from $2.7 million compared to the prior quarter.
As we continued to see strength in orders for natural gas turbine content.
2019 was a strong year for the gas turbine industry and a recovery in our primary customers market share.
Trailing 12 month segment orders are approximately $19.4 million up roughly 33% over the prior year period.
Segment backlog was flat sequentially at $9.5 million.
Offering solid visibility to revenue over the next several quarters.
Second quarter segment sales increased to $4.4 million from $2.9 million in the prior year, mostly driven by higher new gas turbine content.
And our diversification efforts.
Segment EBITDA as a percent of sales is approaching 10%.
EBITDA was $400000 double to prior year quarter.
The operating leverage associated with increased volume.
And effective cost management has resulted in trailing 12 months EBITDA of $1.1 million.
A significant increase over the comparable trailing 12 month period.
Turning to slide 11.
At June Thirtyth, 2020, operating working capital was $20 million or 9.2% of sales.
And $11 million sequential increase primarily due to higher accounts receivable, which is a function of the timing of customer payments.
As a result to this idea so spiked to 43 days from 30 days in Q1.
Accounts receivable balance have have now declined in early Q3 and back into a more normalized range.
Inventory balance declined sequentially to $37.6 million, a 3 million dollar reduction.
As a result D O improved from 88 days in Q1.
To 69 days at 630.
We expect inventory turns to improve and operating working capital to decline throughout the quarter and the rest of the year.
With the cash generated to repay our debt.
Total cash and liquidity increased sequentially, just $22 million and continues to be well above historical levels.
We had $12 million drawn under our $35 million credit facility, and then $2 million of cash on our balance sheet.
As we highlighted on our first quarter conference call, we received approximately $9 million a proceeds under the paycheck protection program.
We believe we met all the requirements set forth by the treasury to apply for the loans ended so in good faith, ensuring continued employment for our employees during a period of widespread economic uncertainty which continues today.
Reference these loans these loans can be forgiven by the small business administration, if buyers can demonstrate that they use the funds on eligible expenses such as meeting payroll ranch mortgage interest.
And utility obligations over a 24 week period.
As of July we used 100% the loan proceeds on these eligible expenses.
We are playing to submit our forgiveness application to our lender and the S.P.A. in Q3.
The U.S. Treasury previously announced that all borrowers that received P.P.P. loans in excess of $2 million will be audited.
However, the timeline for the audit is is unclear at this time.
Did the extent the PPP loans are not forget than the company's required to pay the loans over a two year period at a 1% interest rate.
Our leverage declined again in Q2, ending the quarter at 1.4 times trailing 12 months EBITDA after netting out the P.P.P. loans.
That concludes my remarks, I'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.
Our country has been can confronted with a series of historic challenges this year.
During this period of wide spread volatility our leadership team has continued to stay the course, but.
By focusing on to the strategic priorities, we discussed earlier this year.
These priorities include targeted expansion into our legacy onshore wind and non when markets.
Combined with an entrance into the offshore wind space.
On balance we continue to pursue opportunities, where our unique value proposition and industry experience position us to win.
As for our response to the Cobot 19 pandemic.
We're closely monitoring the potential impact of the virus on our operations customers and supply chain.
We've implemented all necessary and appropriate protocols as recommended by the U.S.C.D.C.
To ensure that continued wellbeing of our team.
Given that all of our businesses are considered essential in critical infrastructure.
As defined by the U.S. Department of Homeland Security.
Our facility for me opened and operational.
Should have become necessary, we're prepared to an active business continuity plan.
To ensure that continued production and shipment of products to meet our customers' needs.
Our order rates have declined since coven 19 outbreak.
As our customers are dealing with the overall economic uncertainty we're all facing.
We have conducted various stress scenarios in each of our businesses and while it's difficult to quantify the full impact of the virus on our business and end markets at this time.
We anticipate that current availability under our credit line will provide adequate liquidity to support our business. During this period of uncertainty.
Turning to slide 14, and 15 for review of demand conditions.
In each of the six end markets we serve.
Let's begin with the when sector, which represented nearly 70% of TTM revenue.
The outlook for this sector continues to be positive.
Driven by various economic forces such as the PTC, including the recently announced one year extension.
The competitiveness of wind power versus other sources.
And the nation's desire for clean energy.
Furthermore, on July Thirtyth, the International Trade Commission issued their final affirmative determination in favor.
The U.S. tire manufacturers coalition finding that the U.S. industry has been injured by imports of utility scale wind towers from Canada, Indonesia, Korea and Vietnam.
Well underlying demand conditions continue to support strength for the sector over a multiyear period, our customers acknowledge that some projects scheduled for this year in early next could be delayed due to the pandemic.
And 2020, we expect that nearly 15 gigawatts of wind power will be installed in the U.S.
All the by 14 Gigawatts next year, both significant achievements.
And as a reminder of the federal government has given an extra year to bring products projects slated for 2020 online without jeopardizing important tax credits.
Tax equity and other forms of financing remain available to fund projects, although some could be more difficult in this present environment.
Looking ahead in addition to the strength expected for onshore installation through 2021.
But mckenzie forecast increasing demand in the out years has offshore turbines gain traction in the U.S.
Adding to a stable onshore demand.
This long term projection for U.S. wind now has improved to include nearly 25 gigawatts of offshore and installations for wood Mackenzie.
Although some projects have moved from 20 to 23 to 2024 and 25.
The industry still expects 2023 to be a strong year for offshore wind development.
We generated about 8% of our TTM revenue from industrial sector.
Which has an outlook of positive to neutral.
Much of our revenue in this sector comes from customers in material handling.
With ultimate end users in defense and similar vital applications, which are less cyclical.
Our deepwater port in Wisconsin, combined with our heavy lifting capacity.
Unique fabrication capabilities and huge paint booz continues to draw strong customer interest from this segment.
8% of TTM revenue came from the power generation sector.
Where we see a positive demand outlook.
Our primary customer in this market is gaining share.
And we continue to expand our customer base in the new gas turbine space.
The mining sector drove about 9% of TTM revenue and our customers report a neutral outlook.
Water from this sector, which was strong in Q1 softened in Q2.
Oil and gas sector, which comprised 5% of our TTM revenue has seen a significant decline in demand.
Hydraulic fracturing economics are less attractive with a recent pull back in crude oil prices, causing customers to defer their capital expenditures.
Construction drove about 1% of TTM revenue.
And we see the outlook for this segment as negative in the near term.
And infrastructure Bill if introduce what certainly benefit us as this will create demand for new equipment purchases to support road building bridge construction and waterway projects.
Turning to slide 16.
Our key initiatives for bride when remain consistent that's our near and medium term strategy for the business remains unchanged in spite of the challenges of Cobot 19.
And the heavy fabrication segment, we're in discussions whether expanded base of cut of tower customers to sell our 2021 capacity.
We will continue to evaluate and add production system capabilities to maximize throughput and profitability.
We continue to see progress around offshore, particularly given the recent announcement of multiyear projects on the east coast.
Reflecting the growing demand for offshore in that region.
We will leverage the investments made in our engineering and supply chain teams to better support the evolving tower market as well as other opportunities.
And lastly, we will continue our built in quality continuous improvement actions to ensure smooth process flows and good throughput in our plants.
And the gearing segment, we remain focused on accelerating our efforts towards end market diversification by leveraging our experience engineering and sales teams.
Further we intend to grow our custom gearbox business and leverage our newest service and repair facility in North Carolina.
To better serve customers in the southeast.
Lastly, we will continue the recent cost actions required to size our business in accordance with market demand.
In our industrial solutions segment, we continue to focus on expanding our core product line of new gas turbines and aftermarket components.
As we expand our customer base in that space with an eye toward the smaller turbines, we don't presently serve.
We will leverage bride ones overall engineering and business development resources to identify and serve new market opportunities, especially those which leverage the combined manufacturing power of all of our divisions.
As for our investment thesis.
We are diversified precision manufacturer, serving clean tech and industrial applications.
Our heritage isn't renewable energy specifically wind.
Which requires very precise manufacturing and handling of large heavy components.
We're excited about our growth potential in renewables and clean tech, but also the opportunity to grow and the other markets, we serve such as material handling power generation and other industrial applications.
We're executing a multiyear diversification plan to leverage our core process capabilities and other markets.
And have achieved TTM revenues of nearly $65 million outside of wind.
Even as we grow our position in wind.
The extension of the PTC for 60 year, which has a real benefit for a wind market.
In the favorable trade case findings provide a catalyst for growth and our heavy fabrication segment.
Thank you for your interest and we look forward to providing updates through the year.
As our business navigate through this period of uncertainty.
With that said I'll turn the call over to the moderator for the human a session.
At this time, we will be conducted a question and answer session. If you like that's question. Please press star one on your telephone keypad.
A confirmation so in the key lives in the question Q.
You mean for starts to people that your move your question from the Q.
Participants easy speaker, <unk>, maybe necessary to be comprehensive before person to start keys. One moment. Please as we pull for questions.
Our first question comes on line of Eric Stine with Craig Hallum. Please proceed with your question.
[laughter] higher kind Jason.
They are warning.
Good morning.
So you mentioned a in the release or looking at strategic alternatives for the offshore market and just wondering if you can provide any detailed there anything you're able to share whether it's kind of the depth of discussions you're having a potentially how many parties you're having those discussions with than maybe next step.
We should look for.
Well, we're I mean, we haven't having discussions with multiple <unk> with multiple parties.
Well, we're having discussions that include.
Ah that potentially producing on the east coast and also producing at <unk> in our minute walk a facility.
<unk>.
Got it and then I mean I would assume.
I would assume there some.
Urgency I mean, there there's it's kind of a mix because you've got these opportunities and they are off 2023 in it you said some you know maybe pushing a little bit to 2024 in 2025 <unk>, but there also are said to substantial announcement gigawatts.
And such that it would seem like there's some urgency on the part of those Oems.
Yeah right is there a 6.4 you know as I mentioned is 25 gig watts that are forecasted by woodmac. There's about six point, we're already contracted and those are due to be installed between 23, and 25 and 1.1 I mentioned that some of its shifting to the right a bit but still there's 1.1 gigawatts projected to be installed.
All in 2023, so I'm really as far as timing.
If we assume if there's going to be a a greenfield factory that might take 18 months to bring online <unk>.
If we finalize our plans in in Q1, we should still plenty of time to act.
<unk>.
It.
Got it okay just to add in we're seeing you know more activities four gigawatt, Oh project announcements coming so that's certainly encouraging.
And.
We're just need to react and respond to keep assessing the economics of that market and make sure that if we're making to make this investment that it's a it's it meets certain hurdles or the companies I think.
Well, we're going to continue to assess that im optimistic that we can talk about that I'm towards ended the year early next year right.
Okay.
All right I'll, then we'll stay tuned for that and maybe on the the recent ITC case, I mean, certainly a positive I know some again I'm that's the outcome that was expected.
And I know, it's it's helped your you know you're the pricing in the margins in your backlog to date.
How do you think that impacts things going forward I mean is that something where you think it will continue to help the margins in backlog.
And then in terms of just supply.
To the overall market I mean, it is something that potentially makes it.
Supply tighten the market or how do you see that playing out.
And just just as a reminder, the I think the department of Commerce, and the ITC determined no that subject country imports.
They participate an unfair trade practices an injury injure the U.S.U.S. industry, we estimate that about a third of of the but the towers.
<unk>.
In in the U.S. were set from the subject important countries.
Canada, Indonesia Korea, Vietnam. The Best result of this is the smoothed production and stable production for the U.S.U.S. tower manufacturers going forward in capacity utilization, which is which is really important for all of us I.
I think the bottom line, though is that Robin in U.S., our manufacturers can absolutely compete with anyone in the world.
A level playing field. Our aim is is to keep the playing field level going forward.
Got it Okay, maybe last one for me just I know last on the last call you had talked about.
That you'd been you were looking at some potential wind tower orders, whether it was from Siemens commits or your to other customers potentially in the near term and I guess, that's something you're still targeting I'm just thoughts on that or maybe status on that and do you expect I know you're at 90% of your functional capacity.
Right now for 2020.
When do you think that you will you will fill that the remainder of that here going forward and the somewhat near term.
As far as 20, it's worth 2020 goes Eric I'm, you know typical lead times for for towers or anywhere between 4.6 months, so it'd be a challenge for us to fill that remaining capacity for 2020.
But certainly regarding 2021, we were active discussions with a number of the Oems and you know we sell to them all now.
For that capacity. So we're optimistic that we'll be able to fill that capacity you're 2021.
We'd expect to to begin announcing those orders <unk> in Q3 into Q4, so we see more commercial activity happening here on the coming months, Yes, I think a sport to keep in mind that four to six month lead time, which is typical on target.
Yes, I know it was gonna be tight, but yes, just said I get your thoughts so I appreciate it. Thanks.
Sure. Thank you.
Our next question comes the line of amid Dell with H.C. Wainwright. Please see with your question.
Thank you all good morning, Eric I just.
Morning.
So this could you just need reconcile you know.
The power capacity booked at 90% for the year before.
The end of Granny Grundy <unk> potential softness you are anticipating in the fourth quarter is this because of the lower order activity in the second quarter or is there is some dancing around this.
Yeah, I think so so Q2 was was we operated near our optimal production capacity.
And and we're expecting that for Q3 as well, but I think there that we what we did see throughout the quarter, which is just various so corbin delays and a in so there was some some weakening in the market. We Didnt book the expected orders that that we were hoping to fill out for the rest of the year. So I think there there will be a little.
What about somewhat of a downturn in plant utilization in Q4 that we'd expect to rebound in in 2021.
Understood.
Then you know I Didnt, that's some of the last part of good commentary and Eric and I apologize if I'm, bringing this up.
You know if you've already addressed it I'm sure.
The decision on the offshore you know when go no go I guess.
So is there something from an investment perspective that you are.
I'm reading for.
Oh or sort of doing diligence on.
What what would be sort of the catalyst W.
Get you over the hump, there's any sort of challenges that you on <unk> before making a calling of entering this market.
Well, we would certainly have to have.
You know <unk> appropriate contracts or orders from.
From our from various OEM customers to make sure that the the investment was was justified over a multi over multi years, we are comfortable contemplating a two or 300000 square foot plant on the east, which we think.
Can satisfy a good part of that the man.
Oh by pressing for catalyst, we'd have to make sure that that our customers.
I have secured how secure orders to support that plant.
And I think that.
What we're going to be watching very closely are the new projects that are being announced and contracted and securities that will then that should drive a catalyst sport for decisions being made for offshore tower production plans.
<unk>.
And with respect to sort of your backlog in order activity did any anything get cancelled, but yeah I've been in their backlog <unk> was mostly everything just pushed out and.
Yes. This is a dynamic yeah. Great question. This is an AMAK I've heard on up on some or customer calls and just I'm just general calls as I truly believe that it's the that at the demand deferral and not a demand drop all because of the uncertainty with kobin into markets that we we took that participate in so the answer is no we haven't any cancellations that.
It's more of these deferrals.
And and tower and tower offtake from our customers has we haven't seen although there's been some supply chain constrained throughout the quarter <unk>. We didn't really we we still are delivering against our contracts.
I think you're seeing more of a deferral in ER in oil and gas a business that we haven't gearing where customers are deferring.
Purchases into the second half.
Okay, and just at a high level from a modeling perspective, so we probably you're looking at you know sequential improvements in the third quarter, and then maybe a little bit of a decline in the fourth quarter.
60 sequentially, yes.
Okay perfect, Yes, that's all I'm good. Thank you so much.
Thank you.
Our next question comes the line of Justin Clare with Roth Capital. Please proceed with your question.
Hi, everyone. Thanks for taking my question.
Hi, Justin.
Morning.
Just on Q2, the operating margin or have you fabrications moved a little bit lower to 7.3% from I think 9.2 in Q1 according to the calculations.
I was wondering if you just help us better understand the reason for the move lower in margins would have expected.
Stable to potentially an improvement because sales were up a little bit in heavy fabs. So any additional detail you will provide there.
Sure.
What does move our margins from time to time are are related to materials. So in some instances customers supply materials to us and that would be excluded from our sales price and our and our material costs. The sometimes you get a bump because of that and that that we did see that from Q1 to Q2.
Do we had higher material content towers in Q2, and we we procure it all the materials offer those power contracts in Q2, so that drop that dropped quite a bit about a change in our gross margin for the company.
Okay got it and then looking into Q3.
It sounds like you expect a sequential improvements I'm expecting that the tower business sales will likely improved in Q3. So what are your expectations on on margins. There and then you know looking further into Q4.
With the potential softer quarter should we see a step lower end margins.
Worse, mirth thinking that will be and a 10% to 11% range with probably on the higher end to that in Q in Q3, and then on the war and the that range in Q4 that would that would get us closer to the year to attend and a half to 11% gross margins for further consolidated company.
Okay got it and I and I think you know some of that is going to depend on the offtake in the gearing business. A you know, we're making a lot of cost changes and rightsizing. The cost structure. So you know that our ability to to deliver against that and also for customers to take product.
I think that will be important done on whether or not we can hit those those gross margin targets.
Got it okay.
Then shifting to a your customers I know you recently added GE is a tower customer was wondering if you could just give us an update on how that relationship is progressing are you seeing a follow on orders with GE easier or Howard discussions.
Gee as it relates to you know towers and 2021.
Well I would say as you know there's there's certain that.
In conversations I really can't share with cut with between bribing customers, but I think that relationship is strong the conversations are ongoing with all with with all three of the tower customers were producing for now.
Okay, and then one last one on the offshore opportunity at this point or you leaning towards a greenfield facility or are you considering supplying offshore from your Manitowoc facility.
This point and then if you are still considering them at a talk facility what would be the timing on a decision you would need to make their I'm imagining it would be a little bit later than what you might need for Greenfield facility.
Yeah, you're right. It's it's a matter of and my leaning one way or to the <unk> to the or the other I'd say I'm, probably 50 50 at this point, maybe a hedge towards the the Greenfield I would say you're right. We would have more time or for the Manitowoc facility. Since we already have the land we have got the building deepwater port we just have to make sure. Some of the equipment was upgraded the <unk> two to handle the.
A larger heavier heavier tower. So we probably have shoot maybe an extra six months or even more to hit this 2023 install.
Thanks, Justin if we elected to go through Manitowoc.
I will pass it on thanks, guys.
Yeah. Thanks, Justin.
We have reached the end of our question answer session and I would like to turn the call back over to every blusher for any closing remarks.
Yeah. Thank you everybody I really appreciate your interest.
We're proud of what we've done so far but look if we're going to do so the rest of this year. When we really appreciate your interest and look forward to speaking with you all again.
So much. This concludes todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation have a wonderful day.
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