Q3 2021 Broadwind Inc Earnings Call
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Greetings and welcome to the Broadway <unk> 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I'll now turn the conference over to your host Tom Giacomini, you may begin.
Hey, good morning, and welcome to the <unk> third quarter 2021 results conference call.
Leading the call today is our CEO, Eric Lasher, <unk>, Tony the company's Vice President and principal accounting officer.
We issued a press release before the market opened today detailing our third quarter of 2021 results.
I'd like to remind you that management's commentary and responses to questions on today's conference call.
These forward looking statements, which by their nature 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.
A discussion of some of the risks and 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. The press release issued today.
At the conclusion of our prepared remarks, we will open the lines for questions with that I'll turn the call over to Eric.
Thank you Tom.
And welcome to those joining us today.
During the third quarter, our team successfully navigated a variety of external challenges.
Continuing to support our wind OEM customers during a transitional period.
Over the near term our industry is grappling with a fluid policy backdrop higher raw material costs and continued supply chain disruptions.
The net impact has been that onshore wind developers have paused activity as they await more certainty around these and related issues with specific emphasis on the structure and duration.
Proposed production tax credit extension as outlined in the by the administration's build back better framework.
While these near term concerns are entirely valid it's important not to ignore the simple reality that on a level is cost basis onshore wind as one of the cheapest forms of energy available to the market.
Whether on a subsidized or unsubsidized basis.
But turbine costs down more than 50% over the last decade.
Commercial and industrial demand for renewable energy is expected to grow significantly over the coming years with wind power, representing the largest source of electricity generating capacity additions in 2020.
While longer term when energy demand will be influenced by the sector's ability to continue to improve its economic position in the face of competition from solar and natural gas.
Our industry has proven its ability to be a cost competitive reliable source of clean energy.
With more than 90 Gigawatts of new onshore wind capacity addition to expected between now and 'twenty 30.
Representing approximately 100000, new tower sections, we're bullish on the long term outlook for our business and industry.
Turning now to a review of third quarter results.
We delivered $40 million in revenue a decline of 26% versus the prior year period due mainly to a decline in wind tower sections sold is.
As referenced earlier this decline in tower sections sold was mainly the result of higher raw material costs and uncertainty around the timing and scope of a potential PTC extension.
The net result of these conditions, what's the towers, we expected to ship in <unk> had been pushed into next year.
We continue to work with our turbine OEM customers.
Who represent approximately 65% of the U S market to ensure that we are ready to support demand in advance of a market recovery.
Currently our OEM customers that place orders to secure about 30%.
How about 2022 power tower production.
For the full year 2022 we expect utilization at our tower plants to exceed 2021 levels.
In June 2021 U S. Treasury Department published by the administrations tax proposals for the fiscal year 2022.
These proposals include a provision that extends the P. T C from 2022 through 2026 for both onshore and offshore wind projects.
In late October the house issued its draft of the budget reconciliation Bill also supporting this PTC extension.
If passed into law the company expects that the administration's planned multi year extension of the PTC should provide a significant catalyst for tower demand.
As a result of the favorable policy backdrop and continued decline in the level is cost of wind energy.
We see a stable demand for wind installations at about 10 gigawatts per year over the next decade.
Our diverse and market strategy performed as intended during the quarter.
It's near record growth in our non wind markets helped to offset softness in tower orders.
Our gearing segment generated substantial year over year growth in both revenue orders and backlog.
Supported by demand from energy and steel markets.
Consistent with our comments last quarter broad winds non wind end markets are recovering.
As our industrial and energy customers place orders to replenish their inventories.
Quoting activity in our non wind markets continues to be strong.
And we expect good order flow for the remainder of the year, especially for gearing and industrial fabrication products.
The full impact of the pandemic remains uncertain at this time.
As the world deals with new variance, but we continue to take actions to keep our people safe and our facilities open.
We expect it to maintain adequate liquidity to support our business through this period of uncertainty.
Within our heavy fabrication segment revenue declined $14 $8 million.
We continue to quote and produce for multiple turbine Oems and this customer diversification will serve us well as the market recovers.
Within gearing revenue increased 6% year over year, while orders more than tripled to nearly $12 million as anticipated improvement in customer activity continues.
Revenue for our industrial solutions segment slightly improved on a year over year basis.
Driven by the delivery of an international order, which was push from Q2.
Due to global logistics delays.
In summary, I am pleased with how our non wind business has improved this year.
We worked through the temporary pause in wind tower demand importantly, we expect wind development activity to increase materially over the next 24 to 36 months.
Particularly should we see a substantial extension of the PTC, which looks as if it has a solid chance of being passed into law.
As before we continue to evaluate bolt on acquisitions that leverage our existing manufacturing expertise and exposure to clean tech markets.
We are considering opportunities for accretive acquisitions of assets or businesses with high revenue and cost synergies complementary product lines and a well established diverse customer base.
That further supports our.
Our diversification strategy.
With that.
I'll turn the call back over to Tom for a discussion of our third quarter financial performance.
Thank you Eric.
Turning to slide five for an overview of our third quarter performance.
Third quarter consolidated sales were $40 4 million compared to $54 six in the prior year quarter.
On a year over year basis sales declined primarily due to a decrease in wind tower sections sold as the wind market continues to experience a pause as a result of escalated steel prices and uncertainty related to the production tax credit extension.
Q3, adjusted EBITDA was <unk> 4 million a decrease of <unk> nine versus the prior year period.
Decrease in adjusted EBITDA is reflective of the lower overall volume level and the resulting plant underutilization in the current year quarter.
Third quarter operating expenses decreased over $100000 year over year, primarily due to reduced incentive compensation.
Interest expense decreased by over 200000 reflective of lower debt levels and a reduction in our borrowing rate.
Turning to slide six and seven for a discussion of our heavy fabrication segment.
Third quarter sales were $28 $7 million.
Down when compared to $43 4 million in the prior year quarter, driven by the aforementioned drop in wind tower demand.
Third quarter orders were $26 5 million, a 15% drop from the prior year period.
Raw tower orders have decreased but we did receive new tower orders from multiple turbine Oems for 2022 production.
The decrease in tower orders Park was partially offset by a strong order intake quarter for our industrial fabrications product line, which is up over 250%.
For the fourth quarter of 2021, we expect to operate at approximately 50% are optimal tower production capacity given our current order book.
During the third quarter, we sold 197 tower sections of 37% decrease versus the prior year period.
All thing and a $2 million decrease in segment adjusted EBITDA.
$1 million.
As we continue to focus on diversification and the expansion of our industrial fabrication product line, we continue to gain traction, resulting in improved commercial activity within the related markets.
Industrial fabrication product lines sales were up 14% versus the prior year and orders were up over 250% to $8 $6 million, almost a $35 million run rate.
Furthermore, at the nine months ended September of 2021 were a record in terms of order intake for the industrial fabrication product line.
During Q3, we also recognize our first sales associated with our modular pressure reducing systems.
This increased production activity has helped us to improve our plant utilization given the near term weakness in the power market, especially in our Manitowoc plant, where the tower production activities comparatively weaker than in Abilene.
Turning to slide eight I will cover our gearing segment.
We continue to be encouraged by the economic recovery across several of our key end markets, including the energy and industrial verticals.
Following a challenging 2020, where energy and industrial demand was noticeably softer than historical levels.
<unk> demand has accelerated meaningfully this year was $11 5 million new orders in Q3 compared to $3 $2 million in the comparable period last year.
Order strength is driven primarily by conventional energy customers together with gains across a number of other markets.
Year to date orders have rebounded to over $29 million versus $19 million in the prior year period.
Year to date book to Bill was approximately $1 five X and our backlog has recovered to nearly $24 million, which represents an increase of $4 million sequentially and $10 million versus the prior year.
Third quarter segment sales increased to $7 6 million versus $7. One in the prior year, primarily as a result of the increases in demand in most markets served.
We generated half a million dollars of segment EBITDA in Q3, an increase of $1 million versus the prior year as we benefited from increased production levels.
Turning to slide nine for a discussion of our industrial solutions segment.
Industrial solutions recorded $4 $5 million of new orders in Q3 down from $4 nine when compared to the prior year period, primarily as a result of the timing of orders from its largest customer.
Our pipeline of opportunities remains healthy, including quoting activities with new customers and new end markets.
Orders within the segment began the year slowly but have accelerated towards the end of Q3 at September was a near record high in October was the highest order month since <unk> acquisition of <unk> in early 2017.
Third quarter segment sales increased modestly to $4 2 million, but EBIT decreased slightly as we had a less favorable mix of products sold when compared to the prior year period.
Turning to slide 10, operating working capital increased $2 $6 million declined sequentially to $19 5 million or 12% of sales drive.
Driving this increase was a decrease in customer deposits of almost $8 million as our customer mix shifted towards new customers typically do not provide deposits.
Total cash and availability under our credit facility remains healthy and consistent with historic levels with over $21 million of liquidity at quarter end. This includes approximately $2 $3 million of cash on the balance sheet.
Our net debt and finance obligations increased approximately $2 million during the quarter to $8 million, which reflects the aforementioned increase in working capital.
On a year over year basis, we reduced net debt by $10 million as a result of the PPP loan forgiveness, which took place in Q2 of this year.
As noted in our press release issued this morning, we expect fourth quarter EBITDA loss to be between 1 million and $1 $5 million.
That concludes my remarks, I will turn the call back over to Eric for an overview of end markets. In addition to simple concluding remarks.
Thanks, Tom.
Turning to slide 11 for further discussion of our outlook for the domestic wind market.
And there are some encouraging signs here.
We have a renewable friendly administration that has taken steps to drive investment, including the P. T extension late last year.
And the consideration of a much longer term PTC presently being negotiated and Congress.
In addition to these considerations the bipartisan infrastructure framework.
Which was sent to president Biden for signature includes grid improvements, which will support the expansion of renewable energy.
Robin supports this legislation as it represents both an engine for new job creation, and a foundation upon which to modernize our aging infrastructure.
With lower cost renewables.
After a pause in installations early in 2022, we expect robust installations for each subsequent year through 2030, consistent with expectations for continued growth in wind energy given its price competitiveness offshore.
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 to North America source of clean power.
Is key to meeting individual state mandates 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 drift driver.
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 probably support the world's transition to a cleaner future our customer diversification initiative remains central to our overall plan.
One that allows us to optimize our production facilities and leverage our skilled workforce 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 when 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 are working to sell 2022 capacity add capabilities to improve our asset utilization and invest in new product development such as we've done for the modular pressure production systems for the natural gas virtual pipeline.
We continue to evaluate the offshore turbine market in the U S for possible points of entry.
As we continue to expand our mix of complementary industrial fabrication customers.
Our gearing segment, we are working to shift our sales mix toward markets, which tend to be less cyclical.
For a more balanced revenue stream.
We've added some capabilities in both machining and heat treat to reduce costs and expand margins while improving throughput.
And we've continued to grow accustomed gearbox business with special emphasis on our repair and upgrade categories to help our customers improve their system reliability and plant utilization.
In our industrial solutions segment, we continued to expand our market share both domestically and internationally.
We have added precision fabrication equipment to increase value add improve our response times and expand margins.
Our opportunities to grow our wind turbine internal component business have also increased as.
As customers seek to reassure more content to minimize global supply chain risk.
In summary, we're committed to being an active participant as the world transitions to a cleaner 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 and at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Please while we pull for questions.
Our first question comes from the line of Justin Clare with Roth Capital Partners. Please proceed with your question.
Hi, guys. Thanks for taking the questions.
Hey, Justin.
So I guess first off I believe you said that for 2022 for the full year, you expect tower utilization to be above 2021 levels.
Wondering you know can you share what gives you the confidence in that outlook given the uncertainty in the policy environment.
Higher raw material pricing that we're seeing right now.
Yeah that that that statement is that kind of a combination of two things Justin yes, we do have some visibility for 2022, we are in conversations with customers about some 2022 capacity.
We also have some projects in the Repowering Repowering state and the Repowering.
Category.
For adapters and whatnot, which also include in that.
And that's.
And that plant utilization metric, but also keep in mind, we've got industrial fabrications that someplace moved through those same those same plants. So with those with the combination of all three we feel confident about that statement.
Okay great.
And then you did mentioned that you see potentially towards the end of 2022 into 2023.
Inflection point in demand for onshore.
Onshore wind just wondering what drives.
That inflection point do we need to see certainty on the on the policy front and then a reduction in raw material pricing.
Or are there other factors that you see that are important.
Well first there is the the fact that wind is is.
Is one of the lowest if not the lowest cost of power generation really available to anybody but in the U S. But yes, I do think the.
The PTC is certainly going to be a driver there and we also believe that steel will begin to rationalize at least that's what our expectation is towards the end of Enzo next year. So that Congress combination of to the policy and a bit of a rationalization.
Steel gives us the optimism.
Okay.
And then just shifting to your the gearing segment. It looks like the backlog here is at its highest level in more than two years and then I think historically you've said.
Sorry, if you kill the crying in the background here.
Historically.
You said with the revenue at a eight to 10 million you are able to generate EBITDA margins at 15% or above.
Given the backlog that you have do you anticipate getting to EBITDA margins of 15% or higher and delivering revenues.
You know at $9 million or maybe above.
Yeah, our yeah. That's a good thanks for thanks for the question Justin I do think when we're when we're at those kind of run rate should that factory kind of $9 million ish a quarter.
$36 million annualized run rate yes.
Yes, we do we do see the ability to because we've got great factory utilization at that at that point.
We can use ourselves better and whatnot.
So yes, I think we could certainly see north north of kind of low low double low double digits EBIT generation, depending on the mix, we could get to the mid range of what you said, which is kind of AGMA, which is geared.
Many factors Association peer.
Peer group, but yes. So it is possible given given us given a certain mix, we can hit those numbers, but certainly above.
Above low double digits.
Okay, Great I'll pass it on thank you.
Thanks, Justin.
Our next question comes from the line of Eric Stine with Craig Hallum. Please proceed with your question Hi.
Okay Tom.
Hi, Eric.
Hey, so interested in your commentary on the inorganic or acquisition.
Outlook and presumably it's just because of how you feel about the balance sheet. You know, maybe where do you expect to focus is is it more on the diversification side.
Or would it be more on the wind side and maybe looking for more content or how should we think about that.
I think the acquisition targets, we're investigating are definitely in the Cleantech space.
If we could see something that would perhaps benefit.
Towers are wind themselves such as maybe a storage solution that would be attractive to us, but we're especially interested anything within the cleantech space, which could be win could be solar where we see the potential of being re rating our valuation multiple.
Most most important is we're looking for.
Acquisitions.
It would be complementary to our business capabilities and our target markets would be in the Cleantech space.
Got it and what what nowadays what kind of multiples are you seeing are you are the.
Multiples, reflecting that there is some near term uncertainty at least in wind or you know still pretty elevated in.
In terms of what potentially is coming on the on the policy front in the renewable space what I, what I've seen is kind of the bargains, if you will which aren't necessarily attract would be in the kind of the eight nine we've seen them, we've seen them much much higher than that.
Kind of in the <unk>.
Eric.
Looking at that in this particular space, but you are right. It has softened a bit and I think it's because of again. This this pulse.
Policy kind of uncertainty that we're all living through right now.
Got it.
Maybe last one for me just just on offshore.
Mentioned, it a little bit I know, it's certainly an initiative you talked about it in the past, but maybe.
Now is that well by the administrations come out.
With some of their measures obviously their goals.
More activity in and certainly some of your customers are part of that activity.
Maybe just an update on on what you see in you know potential steps you're taking.
Well I mean, it's certainly interesting one of the one of the dynamics is it still there in spite of the policy support it tends to be moving to the right a little bit in other words pushing out a little bit to 'twenty three 'twenty four but we're all we're all in this situation we're in.
Very regular conversations with with our OEM customers.
Port locations themselves. So we've been that we've been considering.
Even with some developers so.
Yeah, our messages that we support the development of offshore wind, we believe it's really important for for our country and we will participate but it's going to have to be in a.
And in a deal that makes good sense for all parties involved our customers.
Ourselves and our shareholders so that message is consistent.
Eric, but we still remain very interested but it's got to make sense.
Got it we'll stay tuned on that thanks.
Yeah. Thank you I appreciate the questions.
Yeah.
And again just as a reminder, if you have any questions you May press star one on your telephone keypad to join the question and answer queue. Our next question is from the line of Dow with H C. Wainwright. Please proceed with your question.
Thank you and good morning, everyone.
So.
Yes.
If this BTC comes through for you guys in the next two quarters.
Yes.
Going into Green and Green tree with recovery in your non wind segments, taking place sooner with economies opening up again et cetera.
I mean will we be in a position, where we need to add capacity to meet the wind and run when demand.
Well I'll tell you what that would be a great that would be a great problem to have.
We always we always loved those kind of problems in manufacturing.
I would say it's possible.
And in many cases in our plants, our wind business runs down it's the same workforce.
But it's a different line. So we can we can definitely produced these things next to one another we could perhaps what we would have to perhaps add to the workforce, but even in one of our one of our locations, especially the northern location, we have the ability to expand into other buildings on that peninsula, whereas we could we could increase our work space if we needed to.
Okay understood.
You didn't give us any sort of a sense of.
How much pent up demand there is because of this PCC once it comes through if it comes through.
Will you be able to fill your capacity within a quarter or you wouldn't even faster.
Yeah, well I think that that comes down to the timing of the PTC when it's passed and I certainly hope to see it passed and let's say, let's say late this late this year or Q1, and then we're subject to a little bit of of of project timing.
I think what happened quickly and then what were subject to then as the normal lead times in our business, which I've I've spoken with you about it which could be at the at the shortest maybe a 20 week lead time, sometimes a bit longer than that so so I would say that's why I'm bullish on on the on the second half of 2022, especially towards the end of that adding and heading into 2023.
So think along the lines of maybe.
A month or so for the projects to align back up again and get through the developers the Oems it into us and then our normal supply chain links.
Okay understood.
And with respect to some of these.
Fiduciary trends are you being able to pass along cost increases you are seeing to customers.
These are digesting that yourselves.
Yes, well the answer the answer is yes and no.
Yes.
I think I think you're aware that with regard to the towers business. So we have each one of those is individually quoted as a directed buy situations. So we don't have steel risk there, but there are other components welding gases.
Some indirect spend that has to do with it.
<unk> mobiles and whatnot that we are seeing inflationary.
Inflationary expenses that where we have to offset by our own efficiencies within.
With them within that particular particular business. The other businesses that we have those are all quota directly project by project. So we're able to pass pass much of those on.
The challenge comes if Theres a timing of some of these cost increases are happening more quickly even than even even within a quoting period, which sometimes can be later less than 30 days.
So we are we are faced with with with.
Taking some of those on ourselves and not being able to pass those onto our customers do due only to timing.
But I will say in this inflationary situation the whole entire supply chain, including our customers understand the situation and they are accepting price increases from us.
Okay, that's good to hear.
That's all I have I'll take another question. Thank you.
Thank you.
And we have reached the end of the question and answer session I will now turn the call back over to Eric <unk> for closing remarks.
Well thanks, everyone I appreciate your interest and we look forward to coming back to you. After our Q4 to report those results to you then have a great day.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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