Q1 2022 Broadwind Inc Earnings Call
Okay.
[music].
Greetings and welcome to the broad when first quarter 2022 results conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I would now like to turn the call over to Tom Giacomini, Vice President and principal accounting officer of Brooklyn. Thank you you may begin.
Good morning, and welcome to the broad wouldn't first quarter 2022 results conference call leading.
Leading the call today is our CEO , Eric Latchford I'm, Tom <unk>, the company's Vice President and principal accounting officer.
We issued a press release before the market opened today detailing our first quarter results.
I would like to remind you that management's commentary and responses to questions. On today's conference call May include forward looking statements, which by their nature are uncertain and out 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 of 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 today.
At the conclusion of our prepared remarks, we will open the line for questions.
That I will turn the call over to Eric Thank.
Thank you Tom.
And welcome to those joining us today.
As discussed in previous quarters, our wind business is experiencing a temporary pause in order activity.
Due to a number of headwinds such as the delay in the federal production tax credit or PTC and.
And the high cost of steel.
We believe the wind market will recover beginning in 2023.
And that we could see some potential switching from solar investments to wind investments.
Given the recent department of Commerce case, and the solar industry.
Our non wind end markets remained strong.
Labor remains a challenge, but we've enacted a number of programs to recruit train and retain the talent, we need to meet our customers demand.
We remain focused on quoting contracts competitively.
But with our recognition of rising costs.
We are effectively managing our cash and expect to have liquidity at current levels by year end 2022.
During the first quarter, we delivered $42 million of revenue of.
28% increase year over year.
Led by the heavy fabrication and gearing segment.
Which posted gains of 20% and 98% respectively.
And excluding the ERC impact.
First quarter 2021, adjusted EBITDA increased.
More than $2 million year over year.
We are working with multiple turbine OEM.
Who have placed orders to secure about 50% of our optimal 2022 tower capacity so far.
And we're in discussing in discussions for further orders.
Our quoting activity increased during the first quarter of 2022 as customers Reserve tower production capacity.
For the second half of 2022 and began discussions regarding 2023 capacity.
Cost inflation on key materials remains a headwind for our wind turbine customers.
And one that has dampened near term capital investment in wind.
The cost of plate deal a significant material and the construction of a wind tower.
Elevated.
The significant increase we've seen over the last year.
While broadband absorbs only minimal direct commodity price risk. We believe some customers are waiting for raw material costs normalize before placing orders.
This when balanced against when developers efforts to align projects with the potential PTC extension.
Has pushed tower orders out several quarters.
Our Q1 orders were $53 million.
<unk>, 54% increase year over year.
Led by strength in our heavy fabrication and gearing segments.
Our heavy fabrication segment saw orders of $34 million.
64% increase over Q1, 2021 or.
While our gearing segment booked $14 million of borders a 42% increase year over year. Following a record Q4 2021.
Due to continued strength in our energy and mining market.
Our backlog increased to $117 million or 24% gain year over year with all segments reporting a book to bill ratio above one.
Boating activity in our non wind markets remains robust and we expect the good order flow to continue through 2022, especially from gearing and industrial fabrications customers.
And we are seeing the ability to pass on inflationary cost increases and our new quoting activity.
Within our heavy fabrication segment revenue increased 20% driven by strong repowering industrial fabrication shipments.
We continue to quote and produce for multiple wind turbine Oems and our customer diversification and wind energy segment.
It will serve us well as the wind market recovers.
Within gearing revenue doubled to approximately $11 million.
The anticipated improvement in.
And customer activity continues.
Revenue for our industrial solutions segment dropped by half a million dollars or 12%.
As several shipments were delayed into Q2 due.
Due to incoming supply chain constraints.
Orders for this segment were up 30% year over year.
We are seeing our gas turbine aftermarket strengthen.
And we continue to expand the business globally.
In summary, I am pleased that our diversification strategy continues to provide revenue opportunities.
As we work through the temporary pause in wind tower demand until the headwinds of commodity pricing and policy uncertainty resolved.
Our team has responded quickly.
So the well documented global supply chain challenges.
As we continue to meet our customers' needs.
Keep our people safe.
We expect to win development activity to ramp up gradually over the medium term.
Particularly if we see a.
A substantial extension of the PTC and increased interconnection activity.
With that I'll turn the call back over to Tom.
For a discussion of our first quarter financial performance.
Eric.
Turning to slide five for an overview of our first quarter performance.
First quarter consolidated sales were $41 8 million compared with $32 7 million in the prior year quarter.
Versus the prior year, Q1 sales increase and our gearing and heavy fabrication segments.
Our gearing segment continues to operate in a robust commercial environment.
We saw revenue increase in almost all end markets.
Within the heavy fabrication segment tower section silver flat, but we benefited from an increase in repowering activity as well as a 57% increase in industrial fabrication revenue a byproduct of record level Q4 order intake for that product line.
In Q1, we recognized breakeven adjusted EBITDA compared to adjusted EBITDA of $1 2 million in the prior year first quarter.
It should be noted that the prior year Q1, EBITDA included a $3 $4 million benefit attributable to the employee retention credit as outlined in the provisions of the cares Act.
Excluding the impact of the employee retention credit adjusted EBITDA increased by $2 2 million when compared to the first quarter of 2021.
Turning to slide six and seven for a discussion of our heavy fabrication segment.
First quarter sales were $27 3 million up 20% when compared to $22 8 million in the prior year quarter as.
As industrial fabrication throughput increased due to the strong order intake activity in 2021.
Power sales also increased 13% due to an increase in repowering activity versus the prior year.
Tower sections silver flat versus the prior year quarter as weakness in demand for our Manitowoc tower production was offset by the absence of operational headwinds that were experienced in the prior year.
First quarter orders were $34 2 million or 64% increase from the prior year period.
Despite the industry wide pause in overall power activity orders more than doubled as orders were received sooner than expected to secure available ethylene production capacity and help mitigate potential supply chain challenges.
Overall power demand out of our Manitowoc facility continues to be soft given.
Given the location of wind projects, but we are able to partially offset that temporary softness with other industrial fabrication business as per our plan.
There continues to be strong interest in our Abilene production capacity due to ongoing planned projects in that region.
Industrial fabrication product line orders decreased relative to Q1 2021, as Abilene has been focus on servicing demand for towers, and prs or pressure reduction system units.
Additionally, supply chain challenges has delayed some work with a major customer in Manitowoc.
During the first quarter, we sold 169 tower sections flat versus the prior year period.
However over the last 12 months, our tower sections sold and as a result, our EBITDA has been adversely impacted by the aforementioned pause in wind tower activity.
Despite a lack of power demand in Manitowoc inflationary pressure and supply chain challenges, we have been successful in temporarily reallocating some of our plant capacity from wind to industrial fabrication production.
Where we serve diverse end markets, such as mining construction and energy.
Additionally, demand for tower sections in Abilene remains strong.
We expect to operate at near optimal capacity levels for the balance of the year.
Adjusted EBITDA for the segment was 600000 in Q1.
Excluding the impact of the employee retention credit adjusted EBITDA increased by $1 2 million when compared to the first quarter of 2021.
Turning to slide eight I will cover our gearing segment.
Gearing continues to operate in a robust commercial environment led by energy and mining markets.
As a result of the strength orders totaled $14 1 million in Q1 up 42% from what was booked in the prior year quarter.
And we've begun to book orders into 2023.
First quarter segment sales increased to $10 6 million versus $5 3 million in the prior year sale.
Sales were also up $2 3 million over 28% sequentially.
The favorable sales comps are a result of the strong order intake we have been experiencing since mid 2021.
In addition to some inflationary pressures experienced in Q1, we also incurred costs related to hiring training and learning curve inefficiencies as we ramped up capacity to meet increased demand.
We generated <unk> 5 million of segment EBITDA in Q1, a modest increase of <unk> $2 million versus the prior year period. However, excluding the impact of the employee retention credit adjusted EBITDA increased by $1 million when compared to the first quarter of 2021.
Okay.
Turning to slide nine for a discussion of our industrial solutions segment.
Industrial solutions recorded $4 $5 million of new orders in Q1 up $1 million in the prior year quarter.
Sequentially orders are down as Q4 included a large $3 $2 million follow on order from a new international customer.
Although overall orders are down we have we've been encouraged by the progress in our core gas turbine businesses at.
As both gas turbine and aftermarket orders are up sequentially.
First quarter segment sales dropped to $4 1 million from $4 6 million in the prior year period.
Hi chain delays on inbound materials impacted our production sequencing.
EBITDA decreased to breakeven due to decreased sales volume and a less favorable sales mix when compared to the prior year quarter.
Turning to slide 10.
Total cash and availability under our credit facility remains at an adequate level with nearly $15 million of liquidity at quarter end.
Similar to where we ended 2021.
Net operating working capital increased $4 million sequentially to $22 6 million, primarily reflecting a change in customer deposits due to customer mix.
Inventory balances also remain at elevated levels.
Hi chain issues continue to delay customer deliveries.
We expect inventory balances to normalize over the balance of 2022, as we were able to ship inventory, which we've been carrying for extended periods.
During Q1 net debt, which includes finance leases.
Increased from $10 5 million to just over $19 million as we funded the working capital build and added two significant finance leases to our balance sheet for new machinery equipment within our gearing segment.
Our net leverage stood at one six times trailing 12 months EBITDA as of quarter end.
We are watching liquidity closely and remain committed to managing aggressively, especially given ongoing global supply chain challenges.
We feel comfortable that we have sufficient liquidity available and expect to end the year.
Our liquidity position as we are in today.
As noted in our press release issued this morning, we expect second quarter adjusted EBITDA to be approximately 400 600000.
That concludes my remarks, I will turn the call back over to Eric for an overview of end markets. In addition to some concluding remarks.
Thanks, Tom.
Turning to slide 11 for further discussion of our outlook for the domestic wind market.
There are some encouraging signs for the medium to long term as we expect nearly 12 gigawatts of annual onshore wind capacity to be added through 2030.
With an acceleration of new installation activity in the latter half of the decade.
In the near to medium term, we view the PTC extension rising commercial and industrial demand and repowering activity as catalyst for increased installation.
We're also encouraged by the cooperation between regional transmission organizations, such as the recently completed study by MISO or the mid continent independent system, operator, and the STP the southwest power pool to resolve interconnection constraints are longer shared boundaries.
Robin applause. This cooperation as we need all parties of the value stream to work together from citing to component manufacturing for generation to transmission.
To ensure continued expansion of renewable energy in North America.
Wood Mackenzie forecast, increasing capacity installations from 2023 through 2030, echoing our competence and win.
Long term outlook remains positive as the energy market transition from fossil fuels.
To renewable energy, which includes wind power.
As we continue to augment our wind business with complementary products. Our progress continues across a number of diverse end markets.
Our customer and market diversification initiative remains central to our overall plan, providing opportunities to leverage our valued workforce and optimize our production facilities as wind projects vary from quarter to quarter.
Renewables and other forms of clean power remain core to broadband.
Even as we expand our revenue streams outside of wind.
Today, our fastest growing nine mid segments include power generation mining.
In the industrial segment, including our increasing penetration into the infrastructure material handling and some new inroads into the paper industry.
In our heavy fabrication segment, we're adding capabilities to improve our plant utilization and reduce cost as.
As we continue to work with customers to sell remaining 2022 capacity in both towers and other industrial fabrication.
The broadband Prs line, we introduced in 2021 to service the growing natural gas virtual pipeline market continues to gain momentum and we're developing new models to serve broader application.
And our gearing segment, we continued to shift our sales mix toward markets, which tend to be less cyclical and offer a more balanced revenue stream.
We've worked with our customers to share inflationary cost increases as we deploy new machining capabilities to expand capacity reduce cost and most importantly opened new markets.
Our custom gearbox business continues to grow with special emphasis on our repair and upgrade categories.
To help our customers improve their plant reliability and utilization.
The talent upgrades and process improvements, we put in place and the.
The last year are bearing fruit as we're able to manage the continuing supply chain challenges and win business based on lead times and reliable deliveries.
And our industrial solutions segment were expanding our market share both domestically and internationally.
Including the growing Aero derivatives segment of the gas turbine market.
We've added resources in both operations and engineering.
To continue our growth in our natural gas wind turbines and solar market.
In summary, <unk> remains an active participant in the ongoing clean energy transition.
We see long term growth of the domestic wind market given that wind energy continues to be one of the most cost competitive energy technologies available.
A broadening customer staff, they increasing precision manufacturing capabilities create new business opportunities to help offset the normal order fluctuate fluctuations in the markets we serve.
We are prudently investing in technology and capability improvements in all divisions to improve throughput and reduce costs and address new market opportunities and lastly.
We're adequately capitalized to support our growth strategy.
With that said I.
I'll turn the call 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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One moment, please while we poll for your questions.
Our first question is come from the line of Justin Clare with Roth Capital Partners. Please proceed with your question.
Hi, Thanks for taking our questions.
Hey, Justin Good morning, Good morning, So first off I just wanted to start on the Q2 guidance.
Was wondering if you could just provide a little bit more detail on how you might expect.
The revenue and adjusted EBITDA to trend by segment in Q2, and then just what is driving the sequential improvement in adjusted EBITDA.
From Q1 to Q2.
Yeah, I think we're going to see.
As far as far as the individual segments of the business.
Revenue what revenue will grow from Q1.
We're going to see continued strength in the gearing business is.
I indicated in my prepared remarks, and also we're going to see some shipments out of the industrial solutions because of the supply chain delays, we had or are they going to be resolved regarding regarding regarding EBITDA and the growth. There it's going to be a couple of things is going to be because of the revenue Justin but also we incurred some some costs in Q1 that we don't expect.
Two to continue such as some hiring training.
Ramp up cost in the gearing business as well as we're increasing our capacity to meet demand and also there is a little bit of price impact that we're seeing because some of the price that we were able to take theres some delay in realization.
Okay.
Great and then in your press release, it indicated that Youre anticipating improvement in quarterly financial performance.
As you move through the remainder of 2022. So wondering if you could just touch on the drivers of that improvement and then you know does that mean that we should see adjusted EBITDA sequentially improve in Q2, and then again in Q3 and then again in Q4.
You could maybe expand on that that'd be helpful.
Yeah, I think as we indicated youre going to see the sequential improvement in Q and Q2.
Possibly in Q3 as well Q4, there is still some unsold capacity there Justin and we need to fill so I can't really I can't really comment on Q4 at this time.
Okay.
And then just on the capacity that you need to fill here you know you've you've booked a nearly 50% of optimal tower capacity for the year.
It sounds like Abilene, maybe completely booked so maybe if you could just address that and then so is the.
The goal for the rest of the year or two to fill the amount of torque facility with a combination of maybe tower volume and the industrial fabrication volume.
Yeah I would say is is our Abilene facility is certainly more full than the Manitowoc facility. There. We still have some production that we'd like to we'd like to fill in ethylene towards the end of the year in both in both towers and industrial fabrication, but we certainly have more open capacity in Manitowoc. Fortunately the industrial fabrication business is much stronger in the north.
We're able to take advantage of that overcapacity as we continue to book through the rest of this year.
And the lead times are shorter on the industrial fabrications business so its easier.
To fill as we move through the quarter.
Through the quarters of the year.
Okay, great. Thank you.
Yeah. Thanks.
Thank you. Our next question comes from the line of Eric Stine with Craig Hallum. Please proceed with your questions.
Hey, Good morning. This is Aaron Steele Hall on for Eric Thanks for taking the questions Aaron.
Good morning, Erinn first on on Repower on Repowering.
And are a source of strength in the first quarter can you kind of talk about that and how sustainable that is is it or is it more related to just kind of the pullback in the overall wind business that you're seeing.
I think I think Repowering is basically it's project based Aaron so as the projects come up.
<unk> will work with the Oems to.
To get components, when we talk about retiring or Repowering, we're usually talking about adapters, which is which is what will allow a tower to accept new nacelle and possibly you know a larger larger blade set and so those are those are projects specific we do have some visibility of some projects, but really it's it's time it's time.
<unk> based on the developer the EPC and the Oems.
So I'd say it will continue but it's very spiky.
Alright, Thanks for that and then just on you know Prs can can you just kind of talk a little bit more about that you mentioned.
Some some new products there just just what's the outlook for that and kind of contribution as we head into 2023.
Yes, that's still a rather that's still a rather a small product set for us. The reason we highlighted just because of proprietary although margins are pretty are pretty good on that.
We can see that again, I I estimate that market to be maybe a $10 million to $100 million annual annualized market, we certainly like to get a nice 20, or so percent sure that eventually.
But again the.
The profit profile of those products are higher than the other products, we have because that's proprietary.
To us we also like the fact that that that's in.
The natural gas virtual pipeline space, which we see as a transitional fuel.
As we progress through the renewal toward more full renewable energy generation in the U S.
What I'm talking about new products we.
We have what we call a medium a medium flow.
Which is the lion's share of the market, but there's also a high flow that we're looking to come out with and possibly even a low flow and what that allows us to participate in different markets such as the high flow Ken.
Ken can unload more trailers at the same time, so it has to be at a site.
It needs that type of flow in order for us to them to require that high flow model.
Alright. Thanks, Thanks for that color and then maybe last for me just you know.
As we look to 2023 and an early view there you know do you see some of these challenges dragging into next year or or is there. Some hope that that we can see more normalization there kind of sounds like it's more driven by the PTC and then also just the material costs on the customer and but to me I.
I think on on the yeah on the win on the wind on the wind side I think that continues.
Lobbyists in Washington are certainly on both the solar and the wind side or are lobbying Congress to make sure that they get they get something done to help help our our whole energy policy in the sooner that gets done the better. We're encouraged that we're also seeing in spite of the PTC pause or delay. These operators are working together such as MISO.
In SPP, which are well that's interconnection you need to have both.
The PTC and normalized prices here, but also interconnects to make sure that you can distribute this does this energy from the source of its generation to the source of its use.
We're encouraged that the market is still moving forward.
Erin so yes.
But there is still a pause going on because of the PTC uncertainty I do expect that to normalize through the end of this year into 2023, and that's what the woodmac. That's what the woodmac forecast indicates is a progressive improvement over the next three or four years, all the way through 2030.
Right right, Okay, all right I'll hop back in the queue. Thanks for taking the questions yeah. Thank you.
Thank you. Our next question is coming from Amit Dayal with H C. Wainwright. Please proceed with your questions.
Thank you and good morning, everyone.
Good morning, Amit.
Martin engaged with respect to the capacity.
<unk> teams.
Mhm.
Wind tower orders potentially start coming through later in the year early <unk> versus you know the energy markets also remained strong.
How easy is it to sort of shift.
Be flexible around managing the utilization levels.
If there was sort of an uptick on boots.
Inside and the energy side for you guys when you're integrating three like you know you have to sort of.
Find new capacity.
Are you going to manage you know potentially sort of developments along those lines.
That's a really that's a really good question, we haven't taken any capacity offline. We still have all the equipment is still there being maintained some of it some of it is multi use.
We've maintained a great core of labor and Thats the benefit of having these industrial fabrications portion of our business is we can shift labor back and forth.
Now if the orders come through very robustly, we would have to go back into the market and rehire. We've got great relations with the people that that may have left for other opportunities.
That were in the wind business that we weren't able to maintain but we are confident we can get them back.
With with with the right compensation package and the right visibility in the future. So.
Yes, Amit that that is that is it.
A factor ramp up factor, we have great relationships with with as I said before with with the the local with the local <unk>.
Population somebody they've been getting back the other thing is this.
Of note there is because of the length of the lead times of these things, which can be up to 26 weeks and we've talked about that before that gives us some time to ramp up so it's not like we would have to turn turn the spigot back on within within a month or two so we would have time to recruit and retrained, bringing it back.
Okay understood and as you get through two.
2022 should we expect gross margins to show some improvements as maybe utilization levels improve I'm just trying to think through some of your cost issues. Maybe some of those are still in place, but the visibility.
Do you have should we look to Martin for maybe a sequential improvements in gross margins from here.
I think I think what you should do.
As far as the analysts I would I would take the the particular businesses separate from one another.
The gearing business as I mentioned, where that business is quite strong right now and where we're actually booking orders.
Into 2023, as we work through what I mentioned earlier, the ramp up the ramp up issues the training issues because it does take some time to get these very precise operations get get the workforce up to speed. So I think that will continue to to moderately improve and as I mentioned some of the price actions. We've taken there is some timing for realizations.
And as we've talked before on this on this call that the margins in that business tend to be higher than the other margins.
The other businesses because it's more technical in nature.
I would say industrial solutions is more flat and then as far as it comes to the towers business utilization is really is really key there.
So I think your models are probably sound there when it comes to utilization.
Okay understood.
Thank you.
Okay.
Yes.
Thank you. Our next question will come from the line of Martin Malloy with Johnson Rice. Please proceed with your questions.
Okay.
Good morning.
Good morning, Marty the first question.
The first question I had was.
Related to the <unk>.
Industry when slide you talk about the 80 CVD investigation.
Potentially having.
Some impact in terms of develop our utility spending on types of renewables are you hearing from customers that they're shifting.
From utility solar over to wind.
For their projects.
Given given the uncertainty around the solar panels.
I have not I mean, I would say, there's a lot of industry Buzz there Marty I have personally not whole heard from our OEM customers remember there theyre a little bit far down the line you've got you've got your developers <unk> and your turbine Oems and whatnot. So we haven't heard that but theres plenty of industry Buzz.
And I would say I think it will have an impact all the things considered if you're a developer with an interconnect as I mentioned earlier, if that's there.
And your financials are relatively the same between the solar and wind project you got to figure execution risk and if there's execution risk because they can't get components, maybe theres, a solar or solar panel component.
Restriction I think it could give a nod to wind.
I think it could give it not too and it's tough to tell how much that would be but I think it's definitely a consideration again execution risk.
It'd be much higher on the solar piece at this time.
Okay.
And then just on the balance sheet and I think I heard you state that you expect the liquidity position to be roughly similar at the end of this year from the end of first quarter.
And I.
Maybe if you could just kind of talk through.
I think you also mentioned the inventories are expected to decline I noticed the receivables were up but maybe if you could just talk a little bit about the drivers behind that.
Not using any more cash through the end of the year and then.
Any concern on the bank Covenant front.
Sure Yeah, So I think.
We're expecting our working capital to continue to fluctuate.
The balance of the year, but we expect to be about where we're at right now in terms of working capital our inventory balances there are little bit inflated right now as we're carrying some extra inventory.
As a result of some supply chain challenges that we've had there was also some timing.
As we accelerated the receipt of some steel just in an effort to try to avoid any supply chain challenges. So.
So yes.
We will be funding ups and downs in working capital but.
Again, we think we're going to end up you know where we're at now is some of our inventory balances normalized.
In relation to the covenants.
We're not we're not anticipating.
Anticipating any issues at this point.
Great. Thank you.
Thanks Marty.
Thank you there are no further questions at this time I would now like to turn the call back over to Eric <unk> for any closing comments.
Yes, thanks, everyone I appreciate your attention and interest in our company and we look forward to coming back and speaking with you again after our Q2 have a great to everyone.
Bye now.
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