Q2 2021 Broadwind Inc Earnings Call
[music].
Greetings and welcome to the broad when second quarter 2021 results conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation right in what you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now my pleasure to introduce Jason Banca Chief Financial Officer.
You may begin.
Good morning, and welcome to the <unk> second quarter 2021 results conference call.
Leading the call today is our CEO, Eric Blatchford, and I'm, Jason bond fit the company's CFO.
We issued a press release before the market opened today detailing our second quarter 2021results.
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 on are uncertain and outside of the company's control.
Although these forward looking statements are based on management's current expectations and beliefs actual results may differ materially.
For a discussion on some of the factors that could cause actual results to differ please refer to the risk factors section of our latest annual and quarterly filings with the SEC.
Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release issued this morning.
At the conclusion of our prepared remarks, we will open the line for questions.
With that I'll turn the call over to Eric.
Thanks, Jason.
And welcome to those joining us today.
After a challenging first quarter, our business in global supply chain began to stabilize in the second quarter.
As expected we delivered a sequential increase in revenue, but were impacted by year over year decline in wind tower sections sold as higher raw material costs dampen near term investments by wind tower customers.
The net result was that towers, we expected to ship in Q2 had been pushed into the second half of the current year.
We have now booked approximately 50% of our 2021 optimum wind tower capacity for the second half of 2021 and through July 21 have received orders for about 15% of our 'twenty 'twenty 2 tower production.
As I mentioned on our last earnings call in December 2020, Congress approved an additional year of the production tax credit or PTC at the 60% subsidy level together with a new 30 per cent I T C for offshore wind, creating the potential for increased power demand over the medium term.
In June 2021, the U S. Treasury Department published the by the administrations tax proposals for the fiscal year 2022.
These proposals include a provision for an extension of the PTC, including onshore and offshore wind projects from 'twenty to 'twenty 2 through 2026.
If passed into law the company expects the administration's planned multi year extension of the P. T C would provide a significant catalyst for tower demand.
As a result of the favorable policy backdrop and continued decline of our love lives cost of wind energy Wood Mackenzie, a leading provider of commercial intelligence for the world's natural resource sector recent.
Recently raised its onshore wind installation forecasts by nearly 30%.
2 over 100 gigawatts installed over the next decade.
As we have done throughout the pandemic, we continue to produce and ship products to meet and often exceed our customer's precise fabrication requirements.
N demick related supply chain constraints, while still present east in Q2.
Cost inflation on key materials remains a headwind for our customers and 1 that has dampened near term capital investment in wind.
This is particularly acute with respect to the cost of steel.
Which has increased significantly in the past year.
While broad when absorbs only minimal direct commodity price risk. We believe some customers are waiting for raw material costs to normalize this when balanced against wind developers efforts to align projects, but the potential P. T extension has pushed tower orders into next year.
Our diverse and market strategy performed as intended during the quarter as growth in non wind markets helped to offset.
Softness in tower orders.
Our gearing segment generated significant year over year growth in both revenue orders and backlog supported by demand from energy and steel markets.
We believe our non wind end markets are recovering as our industrial and energy customers are placing orders to replenish their inventories.
Our total orders declined by a third year over year, primarily attributable to the delay in the tower orders I previously mentioned.
Quoting activity in our non wind markets continues to be strong and we expect good order flow for the remainder of the year, especially from gearing and industrial fabrications.
The full impact of the pandemic remains uncertain at this time as the world deals with new era, new variance.
But we continue to take actions to keep our people safe and our facilities open.
We anticipate that our current cash and availability under our line of credit provides us with adequate liquidity to support our business through this period of uncertainty.
Within our heavy fabrication segment revenue declined $7.8 million, we continue to quote and produce for multiple turbine Oems in the U S. But she gets us good customer diversification in the tower market.
Within gearing revenue increased 7% year over year on orders more than doubled to nearly $8 million is the anticipated improvement in customer activity continues, particularly in the energy and steel sectors.
Revenue for industrial solutions segment declined 19% on a year over year basis.
And by lower demand for gas turbine components and a delay in the delivery of an international order due to global logistics delays.
In summary, I'm pleased with how our business stabilize between the first and second quarters I'm pleased at how our team is responding to the still present, albeit reduced supply chain challenges. We've seen in recent quarters to achieve better factory throughput all while keeping our people safe and our customers needs met.
We fully expect wind development activity to ramp up materially over the next 24 to 36 months, particularly should we see a multi year extension of the P. T C.
Which looks as if it has a solid chance of being passed into law under the current administration.
As before we continue to actively evaluate bolt on acquisitions and joint venture partnerships that seek to leverage our existing manufacturing expertise and exposure to clean Tech markets. We continue to consider opportunities for accretive acquisitions of assets or businesses with high revenue <unk> cost synergies complementary product lines.
And a well established diverse customer base.
Further support our diversification strategy with that I'll turn the call back over to Jason for a discussion of our second quarter financial performance.
Thank you are turning to slide 5 for an overview of our second quarter performance.
Second quarter consolidated sales were $46.5 million compared to $50.554 $9 million in the prior year quarter.
On a year over year basis sales declined due to a number of factors, including lower wind tower demand.
Lower average selling price on the mix of towers sold.
And less demand for industrial products across our segments.
Which is driven by reduced orders in the second half of 2020.
Q2, adjusted EBITDA was $12.8 million, which includes forgiveness of $9.2 million of P. P. P loans.
On a $3.6 million benefit associated with the employee retention credit.
As we highlighted on our last conference call. The E. R. C is a component of EBITDA in our segment financials as the credit will be utilized to offset increased payroll costs, resulting from pandemic related disruptions experienced throughout the year.
As we highlighted on previous calls we received approximately $9.2 million of proceeds under the Paycheck protection program, we submitted our forgiveness applications to a lender and the SBA in Q1 and has subsequently receive forgiveness on all loans.
P. P. P loan forgiveness amounts are also included in non-GAAP adjusted EBITDA in our segment financials.
Second quarter operating expenses increased $100000 year over year.
Primarily due to increased legal fees associated associated with our tower collagen trade case.
Interest expense declined to $300000 from $500000 in the prior year quarter due to lower debt levels and a reduction in our borrowing rate.
Turning to slide 6 and 7 for a discussion of our heavy fabrication segment second quarter sales were $35.8 million compared to $43.6 million on the prior year quarter, driven by the aforementioned factors on our consolidated results.
Second quarter orders were $14.8 million with new tower orders from 2 turbine Oems.
As of this call we have approximately 50 per cent of our talk second half 2021 optimal tower production capacity sold.
Versus 85% during the same period in 2020.
As Eric mentioned, we did not see material upside to our full year tower capacity utilization.
As the industry pauses in anticipation of a likely PTC extension later in the year.
Further contributing to the pause of new orders across the industry as the impact of rising steel costs.
While we do not assume steel pricing risk on our tower contracts significant increases in steel prices often influence project viability.
Recall that steel prices typically represent approximately half of the cost of a wind tower.
For the second quarter, we sold 302 tower sections, resulting in segment adjusted EBITDA of $10 million.
Or $4.2 million after excluding the impacts of the P. P P loan forgiveness.
As we discussed earlier, we continued to sell towers to multiple turbine Oems.
Which has been a key strategic objective over the past several years.
This customer diversification as well as expansion of our industrial fabrication product line, which is now at a $20 million annual order run rate.
And success in several trade cases has allowed us to improve our plant utilization over the cycle.
Turning to slide 8 I'll cover our gearing segment.
We are encouraged by the economic recovery at our position within the energy and industrial markets.
On a challenging year for orders in 2020 commercial the commercial environment has dramatically improved in 2021 with $7.9 million of new orders in Q2 compared to $3.7 million in the comparable period last year.
Year to date orders have rebounded to $17.8 million double the last 6 months of 2020.
Energy and industrial customers are restocking inventory levels and resuming capital spending.
In response to the economic recovery.
Year to date book to Bill is approximately 1.4 times <unk>.
<unk> and a recovery of our backlog to nearly $20 million.
Yeah.
Second quarter segment sales increased to $7.4 million versus $6.9 million on the prior year, primarily a result of increases in demand from energy customers.
We generated $2.9 million of segment EBITDA in Q2.
Or $400000 on EBITDA, excluding the benefits associated with the PPP loan forgiveness.
We expect a gradual recovery in top and Bottomline performance throughout 2021 as we book as we begin to execute against our elevated backlog.
Industrial solutions recorded $3.8 million of new orders in Q2 down from $4.4 million compared to the prior year period.
Primarily a result of the timing of orders from its largest customer.
Our pipeline of opportunities remains healthy, including quoting activities with new customers and end markets.
We are encouraged that the business is now leveraging its global supply chain expertise.
Execute against its first tower internals order.
Second quarter segment sales declined to $3.5 million from $4.4 million in the prior year.
Given order timing and global supply chain challenges.
Segment, adjusted EBITDA was $700000, which includes $500000 related to the PPP loan forgiveness.
Turning to slide 10.
Operating working capital increased $5.3 million sequentially to $17 million or 9% of sales.
Late quarter deliveries to our customers and subsequent invoicing led to increases in accounts receivable balance at quarter end cuts.
Customer deposits declined modestly due to order timing.
As we indicated on our last call inventory balances had expected to normalize in the second quarter.
And they did with declining by $8 million.
Total cash and availability under our credit facility remains healthy and above historical levels with nearly $24 million of quit liquidity at quarter end, which includes approximately $5 million of cash on our balance sheet.
As mentioned previously we qualified for $7 million of ERC cash benefits in the first half of 'twenty 'twenty 1.
Netting $5.3 million of cash proceeds to date with the balance to be collected in Q3.
During Q2, approximately 800000 shares of common stock was issued on.
Under an at the market offering, which netted $3.2 million of cash proceeds.
And as we previously announced.
Authorized $10 million a T M offering was completed in Q2.
As a result of the PPP loan forgiveness, our net debt and finance obligations declined to approximately $6 million.
With net leverage declining to 0.4 times trailing 12 month EBITDA as of June 30th.
And on a year over year basis, we reduced debt by $17 million, providing us with increased balance sheet optionality.
As noted in our press release issued this morning, we expect third quarter revenue to be in the range of $38 million to $42 million with EBITDA expected to be between a half a million dollars to $1 million.
Additionally, we anticipate fourth quarter sales to decline by 25% on a year over year basis, given a pause in new tower orders.
As a result of lower anticipated sales, we will likely qualify for the ERC benefit again in Q4.
That concludes my remarks, I'll turn the call back over to Eric for an overview of end markets. In addition to some concluding remarks.
Thanks, Jason.
Turning to slide 11 for further discussion of our outlook for the domestic market.
And there are some encouraging signs here.
We have a renewable friendly administration has already taken steps to drive investment, including the recent P. T X. The PTC extension in consideration of a much longer term P. T C incentive through 2026.
In addition to those considerations the bipartisan infrastructure framework press.
Presently working through Congress includes.
<unk> includes a provision for thousands of miles of new transmission lines to facilitate the expansion of renewable energy briarwood.
<unk> supports this legislation and believes it has a high probability of getting passed.
As it represents both an engine for new job creation, and a foundation upon which to modernize our aging energy infrastructure with lower cost renewables.
And this revised forecast wood Mackenzie is anticipating the extension of the P. D C.
Which drives a significant upgrade to their prior onshore forecast.
It's worth noting that wood Mac expects year over year growth in installations for each of the next 9 years 320, 30, consistent with expectations for continued growth in demand for wind energy.
Offshore remains an attractive growth area for wind capacity additions in the U S primarily off the coast of the Eastern States with nearly 32 gigawatts of new installations forecasted to be put into service during the next decade.
This new source of clean power is key to meeting individuals' state mandate designed to move away from fossil fuels in the medium to long term.
Furthermore, as ESG mandates increased commercial and industrial buyers will continue to be a major driver of the wind power demand in our view.
As we look outside of wind, we continue to make exciting progress across a number of diverse end markets, while staying mindful of our long term strategy to proudly support the world transition to a cleaner energy future.
Our customer diversification initiative remains central to our overall plan 1 that allows us to optimize our production facilities and leverage our skilled work force.
As wind tower orders may vary from quarter to quarter wind.
Renewables and other forms of clean power remain core to our business.
Even as we continued to expand our non wind revenue streams.
Today, our fastest growing non wind segments include power generation mining and the industrial segment, which includes our penetration into the material handling and marine markets.
In our heavy fabrication segment, we're working to sell 20 twenty-two capacity.
And add capabilities to improve our asset utilization and throughput.
We continue to evaluate the offshore turbine market in the U S for possible points of entry as we continued to expand our mix of complementary industrial fabrication customers.
We also continue to innovate leveraging our precision manufacturing expertise.
In July we unveiled our new proprietary pressure reduction system added energy Tradeshow in Texas with very positive customer response.
This system is designed to support the growing virtual pipeline infrastructure, which uses cleaner burning natural gas to replace the less carbon friendly fuels, such as coal and fuel oil.
In our gearing segment, we are working to shift our sales mix toward markets, which tend to be less cyclical and offer a more balanced revenue stream.
And I've added some new capabilities to bring more value added content in house, while improving throughput.
And we will continue to grow our custom gearbox business through more emphasis into the repair and upgrade categories.
In our industrial solutions segment, we will continue to expand our market share both domestically and internationally by increasing content with existing customers and focusing on new opportunities in the E. P C space.
We've delivered our first internal component order for the wind industry and are actively quoting additional opportunities in both.
The new build and Repowering wind spaces.
In summary, our business remains an active participant in the development of technologies integral to the ongoing clean energy transition.
We see a long term growth path forward within the domestic bond market.
Given that more than 140 gigawatts of installations are planned over the next decade, including both onshore and offshore opportunities.
This growth is driven by 3 primary factors first the cost of wind energy has dropped dramatically in the last decade, making it 1 of the most competitive energy technologies available on the market.
We are policymakers, providing incentives to encourage investments in wind, including the PTC and ITC announcements and the reintroduction of the Green Act supported by approach Renewables administration, which has reentered the.
On the Paris climate accord.
And finally growing ESG initiatives, both mandated in voluntary will certainly continue to drive demand for wind.
We are committed to being a vital participant in the worlds transitions to a cleaner energy future.
And given the continued strength of our balance sheet, we are well capitalized to pursue both organic and inorganic opportunities that further support our growth strategy.
With that said I'll turn the call back over to the moderator.
For the Q&A session.
Thank you we will now be conducting a question and answer session.
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Yeah.
Our first question does come from the line of Justin Clare with Roth Capital Partners. Please proceed with your questions.
Hey, guys. Thanks for taking the questions.
Justin Good morning.
Good morning, So first off you know you've talked about the delays youre seeing in wind tower orders I wanted to see you know do you expect these delays to potentially lead to a stronger 'twenty 'twenty..2 you know I know you indicated that 15% of 'twenty 'twenty 2 production is.
We booked how does that compare to where you would typically be this time of year is that ahead of schedule here.
We're actually a little bit ahead of schedule.
Yeah, we certainly like to have more than 15 per cent per wherever.
Normal normal schedule on.
Order patterns.
I think something to consider is that you know.
On the likelihood of the PTC extension you know if that's extended at the end of the year that may that could trigger some additional projects, but given given lead times.
Lead times for components typically can be like 4 to 5 months. So you you might see a really strong.
Back half of the year or Q4, but it's probably a little bit too early to read them into the into the 15% at this time.
Okay got it.
And then and then turning to your guidance here you know you've talked about you know second half tower production for this year at 50 per cent of optimal capacity are you currently 50 per cent books for the back half right now or do you need to add additional bookings and then you know.
I know, it's getting late in the year, but is there opportunity to potentially add bookings to get you above that 50% level or where is that unlikely at this point.
I'll start with the first part of the question, we do have that 50% in our backlog today, it's there's there's more weighting towards a Q3.
For for production. So Q4 is going to be a little bit lighter than we indicated that in our press release. This morning.
Yeah, I would say just that it's technically possible, but gift, giving due due to lead times of up steel on especially internals as we've talked about before on calls.
The likelihood of pulling things into Q4.
It'd be difficult at this time.
Okay, Okay got it.
And then just 1 more on margins you know we've seen margins for your customers get squeezed a bit as a result of the increased pricing for raw materials and steel in particular.
Steel is a pass through but wanted to see you know are your customers looking for you to share some of the margin impact.
From the higher steel pricing.
You know any change to the contracts.
And.
Yeah, so so any change there.
Yeah, I would say I would say just in our customers are always looking for us to optimize our.
All of our factories to make sure our conversion costs are Rs as effective as they can be we are working with them to try to optimize their designs to make sure that again, our conversion costs are as a as best as possible, but no. We haven't been asked to take to take steel risk or compressed margins directly result of the steel increase.
Okay, great. Thanks, guys.
Yes.
Thank you. Our next question is come from the line of Eric Stine with Craig Hallum. Please proceed with your question.
Great. Thanks for taking my questions, It's Aaron's per hall on for Eric.
Hey, Eric.
You know maybe first I mean, you you gave a lot of great detail on on the backdrop for for onshore it sounds like it's actually strengthening despite how the back half and kind of current orders in backlog look but can you just provide a breakdown you know roughly on the push out of demand between the policy uncertainty and materials costs and then just confirm that.
This as you know, mostly all push outs and no real loss business on on your end.
Yeah, I certainly do believe it's it's it's push outs. If you if you take a look at the P. T C. Erin the P. T. Yes, but the price of steel is certainly a bit of a tailwind to our consideration, but the P. T. C itself is has a lot more value to the developer and ultimately to the project then it an increase in the price of steel.
When you take a look at these P. T C scenario some of them buying suggesting as green book, 100% PTC for projects for from 'twenty to 'twenty 'twenty, 7 and even in wood Mac's assumption. They haven't they're having 60 per cent and that really has provided a significant lift in onshore.
Which is obviously very material for us. So you know kind of reiterating a question, yes steel the price of steel on commodities and P. T C uncertainties as theyre, both impacting but I think the P. T C uncertainty has a greater impact.
Understood. Thanks, and then maybe second on offshore you touched on it a little bit you know we've been seeing some nice increased activity. There lately can you just give a little more color on how you're getting position there and when we can maybe start to see that contribute to results.
Yeah, we're monitoring the activity off the east coast and even if you take a look at the what's in our presentation that tends to shift a little bit to the right.
Because of these things are in the timing of these things are such major projects. They tend to be delayed we're still determining how best the services market is it firms up.
You've got multiple avenues for growth on offshore wind is definitely 1 on ones that debt remains on the table for us but.
As a reminder, we've.
Previous calls I've talked about where we're evaluating multiple ports on the east coast, we've got viable.
Turning to us for both our customers and developers and we're in discussions with stakeholders in this in this space, but we just we in order to support an investment of this size, we need firm contracts from Oems and our developers in order to make the project, Pennsylvania.
Understood and then.
1 more for me maybe on the on the gearing segment you had a nice rebound in activity. There can you just kind of talk about the outlook for margins you mentioned a pick up as we go through 2021 cannot get back to you know some of the margins that you've seen in the past few years from an EBITDA perspective.
Yeah. We've so the history has been when we operate above 8 in the $8 million to $9 million of revenue range per quarter, we have generated greater than 15% EBITDA margins and that's how we are that's how we are focused on the business today there has been.
Some mix changes within our products and there's new products that are being introduced by our customers. So we were always working through those startup related issues, but.
But over the over the long term, we are still targeting that that business or that segment to be greater than 15% EBITDA margins.
Yeah, the only thing I would add to that Erinn as we penetrate new markets and we want to take we wanted to take positions in those markets, sometimes debt that may come at a temporary.
Net of a pressure on margins, especially if it's a new product for us, but that's designed to to increase our diversification and expand or extend our base.
Great. Thanks for taking the questions.
Sure.
Thank you. Our next question is come from the line of Sameer Joshi with H C. Wainwright. Please proceed with your questions.
Thanks.
Jason how are you guys.
Hi, good morning.
Money so.
EBITDA.
And on this 15% the capacity that is booked.
Mainly because of the shifting to the right because.
Because of maybe.
The steep price.
Russia on a P D C our prospects.
Or is that yeah, we absolutely book.
I'm sorry, you had a second parts of the question.
No no that's it.
Don't forget that you're on.
Yeah, I think again, if you take a look at it.
If the forecast it definitely is increasing.
Increasing so we're definitely very excited about that increase.
But there is this passes hesitation as as customers and developers evaluate what level of PTC is going to be out and maybe when when steel started to rationalize. So I firmly believe it is a it has a slide out.
And no longer term.
No impact to them on it.
And just on a little bit of clarification in terms of club the steel prices steel prices are with them.
But the your.
Your profitability on the on the gearing segment or are there other it looks like this.
We are in outside of towers, all of our well actually I should say all of our projects within the company are all our peers within our our company are project based including gearing. So what we are doing is we are sort of locking in steel prices at the same time that our.
Commercial securing contracts. So we're not taking that steel price risk. So a long way to say we are passing steel cost increases.
Increases onto our customers, yes that had set a different way because of the uncertainty the price of steel now. If you were if you were a customer of Brad Foote gear or on any of that Robin divisions. You would see that you are the duration of your quote where it might be 30 days or 45 days is now it could be it could be 2 weeks or less because we want to make sure.
Sure that the price of steel reported is the price of steel we can't we can we can receive.
Understood.
Thanks for that.
In terms of your discussion a discussion about the acquisition and expansion.
Into non win.
I heard you talk about.
On the pent up need.
E P C as well do those buzzwords indicate that you maybe diversifying into services or will it be still rather focus.
No as far as far as the M&A. The M&A no. It would be certainly we're focused on on clean tech or smaller bolt ons that would do it would be accretive to our existing businesses, but what I mentioned upgrades upgrades and repairs and maintenance those are active targets for us in the gearing market that tends to be how some some new customers.
No and learn about Brad Foote gear, because they have a problem with their existing box that may or may not be our brand.
We get in and help them with that and then it helps them. It helps them learn learn Brad Foote and more often than not they'll buy new Brad Foote.
Gearboxes after the fact.
Got it and just 1 last 1 in terms of the grid keys, whatever little foot expenses, you're incurring now.
Now moving maybe this information is on the Q, but it's.
Could you just tell us.
How long do you expect that expense to be debt on them.
Statements. Yeah, we don't we don't provide that level of disclosure, but I I I would say that a majority of those those are expenses have already flowed through our financials there might be some residual S.
SG&A in Q3, and Q4, but largely it's complete.
Great.
Thanks, a lot for taking my question.
Thank you. Thank you.
Thank you there are no further questions at this time with that we do thank you for your participation. This does conclude today's teleconference.
You may disconnect your lines at this time.
Have a great day.