Q3 2022 Broadwind Inc Earnings Call
Greetings and welcome to the broad one third quarter 2022 results conference call.
At this time all participants are in a listen only mode. A brief 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 and as a reminder, this conference is being recorded.
It is now my pleasure to introduce Tom Cecconi CFO . Thank.
Thank you Sir you may begin.
Good morning, and welcome to the broad when third quarter 2022 results conference call.
Leading the call today is our CEO , Eric Blackbird, and I'm, Tom Shoney, the company's Vice President and Chief Financial Officer.
We issued a press release before market open today detailing our third quarter results.
I would like to remind you that management's commentary and responses to questions. On today's conference call May include forward looking statements, which by their nature are uncertain and outside of the company's control.
Although 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 with that I'll turn the call over to Eric.
Thanks, Tom.
And welcome to those joining us today.
I'm pleased to report that demand conditions improved materially during the third quarter as both orders and backlog increased to multi quarter highs.
Booked $85 million of new orders in the third quarter more than double the prior year period with all segments posting significant increases.
Most notably our winter orders more than doubled from last year as.
As the recent passage of the inflation reduction act or I R. A T.
Together with a decline in select raw material prices from recent elevated levels.
Led to early indications of recovery within the sector.
Our gearing and industrial solutions businesses continued to show strength in orders during the quarter with both segments posting three 4% increases versus last year.
Yeah.
Well operationally labor remains a challenge we've taken steps to improve our recruiting and retention efforts.
While continuing to offer a competitive benefits package in the markets, where we operate.
We are managing the impact of cost inflation and are collaborating with our customers to share these higher costs.
While introducing strategic pricing actions as we ensure stable margin capture.
We are effectively managing our cash and expect to have liquidity remain near current levels by the end of this year.
We generated revenue of $45 million in the third quarter, our year over year increase of 11% led by growth in our gearing segment and industrial fabrication product line.
Posting gains of 35% and 95% respectively.
We generated $1 $9 million of EBITDA in the quarter or year over year increase of $1 $5 million.
We are encouraged by the passage of the I R. A T.
And it's significant support for renewables.
Which we see as a major catalyst for our wind business for years to come.
We are currently seeing increased quoting activity with our wind customers expressing interest in tower capacity into 2024.
We have now secured orders for tower production into mid 2023.
Our heavy fabrication segment saw orders of $63 million up more than 137% year over year led by wind tower orders.
Our gearing and industrial solutions orders of $15 5 million and $6.1 million, respectively for each up 34% year over year.
Our total backlog at the end of Q3 was $132 million, an increase of 73% versus the prior year period.
Quoting activity in our non wind markets remains strong.
And we expect the good order flow to continue through the balance of this year.
Within our heavy fabrications segment revenue grew 7% to $31 million as non wind demand offset a reduction in tower sections sold.
Aside from our core tower business, we continue to allocate spare tower production capacity towards other projects in the energy commercial and industrial markets.
Within gearing revenue was $10 million or 35% increase year over year as customer activity continues to be strong within the energy and industrial sectors.
We are seeing the positive impact of our upgraded sales team and revised commercial strategy in the form of new customers and increases in our profitable gearbox repair and upgrade service offering.
In summary, I'm pleased with is that with a substantial increase in order activity. We experienced in Q3 as we build a strong backlog going into 2023.
Our team continues to work with our sourcing partners to address persistent global supply chain challenges, even as we optimize both our assets and human capital during this transitional period and tower demand.
We expect wind development activity to ramp up gradually over the medium term as the market favorably responds to that substantial extension of the PTC included with the I R. A.
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 six for an overview of our third quarter performance.
Third quarter consolidated sales were $44 $8 million compared to $40 4 million the prior year quarter.
Versus the prior year Q3 sales increase within our gearing and heavy fabrication segments, but decrease within industrial solutions.
The 11% increase in consolidated sales was primarily driven by increased gearing demand within its energy and industrial end markets.
Within the heavy fabrication segment, we experienced a nearly 100% increase in industrial fabrication revenue. A result of strong recent order intake, but was offset by a 26% decrease in tower sections sold.
Industrial solutions sales were also down marginally.
In Q3, we recognized $1 $9 million of EBITDA compared to <unk> 4 million in the prior year third quarter.
The improvement in EBITDA is reflective of the higher overall volume level and a corresponding increase in plant utilization, which contributed to improved operating leverage in the period.
Turning to slide seven for a discussion of our heavy fabrication segment.
Third quarter orders were $62 $9 million and 137% increase from the prior year period.
The increase is attributable to a $40 million increase in tower orders as demand remains elevated for our Abilene production capacity due to ongoing or planned projects in that region.
Third quarter sales were $36 million up from $28 seven in the prior year quarter.
Weakness in Q3 tower sales was largely offset by a nearly 100% increase in industrial fabrication revenue, which benefited from strong demand from industrial customers as well as foreign natural gas pressure, reducing systems or Prs units.
During the third quarter, we sold 145 tower sections.
From 197 sold in the prior year period, and reflective of the continued weakness in tower demand out of Manitowoc, when compared to the Abilene facility.
We expect Abilene to continue to operate at near optimal capacity levels for the next several quarters.
Segment, EBITDA was $1 $5 million, an increase of <unk> 5 million when compared to the prior year period.
Turning to slide eight geared.
Gearing orders were strong in Q3 totaling $15 $5 million up 34% versus the prior year period, and nearly 75% sequentially.
Third quarter segment sales increased to $10 $2 million.
Versus $7 6 million in the prior year quarter.
As a result, as a result of strong order intake we've been experiencing.
Since mid 2021.
We generated $1 2 million of segment EBITDA in Q3, an increase of <unk> 7 million versus the prior year quarter and $1 1 million sequentially.
Results versus the prior year period were favorably impacted by increased volumes and a more profitable mix of products shipped.
We ended Q3 with almost $39 million in segment backlog, our highest level in recent history.
Turning to slide nine.
Total cash and availability under our credit facility remains at an adequate level with almost $15 million of liquidity at quarter end.
The sequential improvement in liquidity as it related to the increased availability afforded by the Wells Fargo credit agreement that was finalized in August 2022.
Net operating working capital increased modestly in Q3 to $26 $3 million, primarily reflective of a decrease in accounts payable attributable to the timing of vendor payments.
Looking towards the end of the year, we expect slightly lower to flat working capital levels as inventory levels continued at a moderate response to some large expected shipments and an improving supply chain.
During Q3 net debt increased $4 $6 million as we funded the working capital build capital expenditures and prepaid assets, we added new debt associated with the machine purchase and we satisfied our interest obligations.
While we have taken measures to improve liquidity, we will continue to manage it prudently given the increasing interest rate environment.
Finally, with respect to our financial guidance, we expect Q4 EBITDA to be approximately <unk> 2 million to point $5 million.
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.
In the near to medium term, we view the I R. A S. A significant positive catalysts for the wind sector.
As it provides the policy certainty long awaited by developers.
Now, let the IRA as law do you believe that this supported by rising commercial and industrial demand will drive increased wind installations beginning in 2023.
In addition to the positive developments of the I T of the PTC extension for wind in the ITC for solar we await final.
I R. S guidance on the precise treatment of additional incentives in the Eyrie Act such as the advanced energy production credit score sexual forty-five ask.
This provides a new production credit for domestic manufacturers of components relating to clean energy, including the wind towers, we produce.
As we look toward the remainder of the year and into 2023, we have increased visibility and stronger backlog across each of our operating segments as.
As we continue to expand in new adjacent to clean tech markets, such as solar clean fuels power and infrastructure building on our legacy within wind.
In our heavy fabrication segment, we're adding automation to improve our plant throughput optimized labor and reduce costs as we continue to work with our customers to book capacity for towers and other industrial fabrications in 2023.
The proprietary broad win pressure reducing system product line introduced last year to serve the virtual natural gas pipeline market is progressing nicely and plans are on track to introduce a new high flow model to that line early in 2023.
Given our current capacity, we have the ability to generate approximately $20 million in annual incremental revenue from this line.
In our gearing segment, we are seeing success with our efforts to broaden our sales mix into less cyclical markets offering a more balanced revenue stream as shown by the accelerating bookings from our customers in steel processing and power generation.
In Q3, we saw improved price realization offsetting some of the inflationary cost increases seen this year.
Labor is still a challenge for us as we work to increase our force to meet the increasing demand.
And we're pleased to see the favorable impact of increased plant utilization and our Q3 results.
Looking forward over the next several years.
We are building a precision manufacturing company, which proudly supports the world's transition to a cleaner future.
We take pride in that mission.
And are developing a culture of operational and commercial excellence supporting that important cause.
With our significant process capabilities, we will expand in high growth clean Tech markets.
<unk>, both our internal and customer led product development efforts.
We want to expand on the on upon the foothold we now have in wind clean fuels in power generation.
As we look to enter the solar market in a more meaningful way.
We will drive margin expansion and profitable growth, leading to reduced net leverage giving us balance sheet optionality.
With a successful execution of this strategy, we expect to generate significant growth in both revenue and EBITDA over the next several years.
We are carefully managing cost capex and liquidity as we execute our strategy and remain adequately capitalized to support our growth.
With that said I'll now turn the call over to the moderator.
The question and answer session.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star keys one.
One moment, while we poll for questions.
Our first question comes from the line of Amit Dayal with H C. Wainwright. Please proceed with your question.
Thank you good morning, everyone. Good to see you know our backlog and order activity picking up for you guys. Congrats on that you know one question around that.
Why don't you perspective are you comfortable you know.
In terms of your outlook.
To meet sort of the higher order activity. The you know.
But the bigger backlog et cetera.
You're talking about our hi, Matt This is Eric I'm talking about our production capacity.
No I'm just talking about the working capital liquidity.
Situation you know are you comfortable with the what's your balance sheet looks like right now.
Yes, Thanks Amanda.
Yeah Yeah.
Yeah, Yeah, I got you I mean, I, yeah, I do worry about we have about $15 million in cash and availability online right now.
And we feel that a lot of the operate operating working capital build that we've experienced has kind of moderated at this point. So we expect to go into Q4 with.
Glad to maybe a slightly improved operating working capital. So I think going into 2023, I think we feel pretty comfortable.
Hum.
Sequentially you know are you all.
Positive about how Q4 will shape up for you given all of this increase in orders and backlog.
Well I think a lot of the orders that we're taking are really for 2023 production. Our Q4 has been yeah. It's been I guess.
Firmed up prior prior to a lot of that order intake.
Okay understood understood and then on the on the cost side. Obviously as you you know Ram revenues in you know add capacity are bringing additional capacity online.
How should we think about costs.
<unk> through 'twenty, 'twenty T and maybe even drilling 24.
We're seeing our cost increase pursuant to inflationary cost increases that you've seen kind of the 5% to 8% range with with labor and whatnot and ancillary costs, but Fortunately, we are able to get price realization to offset that Amit.
Okay. So those have already been implemented.
Yes.
Okay understood.
Are you attributing a lot of the recent positive sort of order and backlog activity to the I R a or whether any other firms.
That supported the you know these developments.
Yes, I would say the IRA has had some influence but but the majority of the influence has to do with the.
The order activity in our southern region, there's a lot of projects in the Texas, Oklahoma, Kansas region that we are well located to be able to take advantage of subsequent to that though we are seeing order activity and interest quoting activity and interest increased as a result of the I R. A.
Okay understood. That's all I have for now I'll take my other questions. Thanks, Amit.
And our next question comes from the line of Martin Malloy with Johnson Rice. Please proceed with your question.
Good morning.
Nice to see that I'm Arctic border trends.
Pick up here with.
With respect to win.
First question, you mentioned solar or a couple of times, what what are you all doing.
With respect to solar.
Yeah through our industrial solutions segment, we're doing things like <unk> and Burger skids. There is there's a whole cycle of field replacement. That's now coming online now that solar has had some years in the field.
And where our customers are asking us to help them design and manufacturer replacement Burger skids to go out into the field that are used to upgrade and replace.
We're wearing and burgers kids that are in the field. So it's a replacement cycle.
Okay.
And then just with respect to the wind order trends.
I believe that facility I understand that that's been <unk>.
Operating at a pretty high utilization for a while but the.
The main talk facility there there just hasn't been the same demand in that region for wind towers.
And one of the.
The publicly traded wind blade manufacturers suggested on their call that it would really be second half of 2023 before you would see a big ramp up in orders.
Can you maybe talk about what you expect in that that region that the Manitowoc facility serves from a wind blade for wind tower perspective.
Tom Yeah, Marty Thanks for the question.
Yeah. Thanks for the question. We are we are seeing the same thing.
Seeing that Accra across really across the market, including some of my competitors and in towers, we do think because of the length of the of the project cycle. It can take several quarters for for the final to fill back up again, so we are maintaining our capability and our ability including our workforce.
To a large extent to be able to ramp back up to.
Me tower demand in the North, which we do expect to come come back in the latter half of 2023 into 2024.
Great. Thank you very much for answering my questions.
Thanks, Marty it's Marty.
And our next question comes from the line of Eric Stine with Craig Hallum. Please proceed with your question.
Good morning, Eric.
Alright.
So just coming back to solar a little bit E detailed higher involved now it did seem and maybe I'm misreading it but it did seem from the from the presentation and also your remarks, though that you do have some bigger aspirations.
Fair.
And if so would that be.
Utilization things more along the lines of what you do and in your non wind segments or would that be potentially a.
A related acquisition something along those lines.
We've got the ability to serve that market out of industrial solutions and in a growing met and in a growing way.
Eric but I do think if we're going to be meaningful.
In participant in solar it could come through.
An acquisition over the next several years.
Got it but that's not it doesn't sound like that.
It does sound like you have bigger aspirations, but not necessarily near term.
Right now it would be the existing business and growth for industrial solutions.
That's correct organic routes industrial organic growth through industrial solutions, that's correct Yep.
Okay.
That's helpful and then.
You know a lot of talk here well certainly good to hear that.
But some of the wind growth you know that it's not all IRA related in that that likely is to come but I'm. Just curious has there been any change I'm just kind of OEM stance and offshore are related to the I R. A I know that that's a little bit longer term, what Oems are often thinking longer term.
We haven't seen any meaningful change and in fact, we.
We are seeing some developers renegotiate some of the P. P A's with rock with regard to offshore because of their increasing costs. So the interest is still there with our OEM customers and the developers we're talking to but it continues to push to the right primarily because of permitting.
And interest rates and inflationary costs.
Yes.
I'd say the one project that got some press up the East Coast I think it was this week, but okay and maybe last one for me I just noticed in the presentation talking about working capital and you you noted a decline in project deposits was that is there anything specific to that is that timing.
Any color there would be helpful for me.
Yeah. Thank you Eric is that I think that's just more due to the mix of customers that we're that we're currently working with so I you know that tends to ebb and flow depending on who we're working with at the time so.
And really that's all that's related to.
Okay. Good to hear thank you.
And our next question comes from the line of Justin Clare with Roth Capital Partners. Please proceed with your question.
Yeah, Hi, thanks, Thanks for taking our questions.
I guess first off here just in a in Q4, it looks like you're guiding to a quarter over quarter decline in adjusted EBITDA.
Despite the strong order flow in Q3, so I was wondering if you just talked through.
Oh, you know what might drive the decline quarter over quarter that youre anticipating here is it lower sales or are you seeing margin compression and then and then from Q4 as we look into 2023.
How should we think about you know how things trend.
Yeah, I'll take that question I'll take that question, Justin and good morning.
That is directly result for some relief from some really competitive tower orders, we had to take.
To maintain our plant utilization or Abilene facility.
And that particular order has us going through Q4 into Q into Q1.
Okay got it so after Q1 that order rolls off and we could see an uptick in margins beyond that point in time.
Yes, most definitely.
Okay, Okay, Great and then just with the with the increase in the backlog for heavy fabrications that we've seen I was wondering if you can just talk about how much of your capacity is booked for 2023 and.
Have you mentioned 'twenty 'twenty four have you booked anything for 2024 at this point in time, because it seems like it would be quite early but just wanted to see if your customers are looking really that far out in time now.
Yeah for from a work from went from wind standpoint, if you're speaking to when specifically then no we've not booked into 'twenty 'twenty four and any wind orders, but there are discussions into 'twenty 'twenty four with regard to win with regarding gearing we are booking into 2024.
Okay got it and then wanted to better understand the the manufacturing tax credit here could.
Could you share what you're expecting for the value of that credit per tower here potentially.
I know, it's partly where hammond.
Yeah, well I'll, let you go ahead.
Yes. It is we're still trying to kind of figuring it out and we're waiting for the IRS guidance, which we expect to come out in the next several months we.
We hope sooner rather than later, but the section you're referring to is called forty-five acts and that that calls for specific refundable credits for the domestic manufacturer of clean tech components.
AIDS in the cells and towers are specifically called out and for towers. It's a three cent per watt credit. So if you think about let's say, there's a three megawatt turbine and we produced the tower underneath that three megawatt turbine.
It's like 3 million watts, and a N a N a three megawatt turbines so that could be.
Math about $90000 credit for that tower.
Right Okay.
And then I believe that kicks in at the beginning of 2023. So just wondering if that's correct how how how should we expect this to kind of flow through your financials or how would you monetize this like well you get cash payments from the U S government on a quarterly basis or a how should we think about that part.
Yeah. Thanks, Justin.
So what we know is that we will be able to monetize them.
You don't necessarily have to be a taxpayer at I'd say for the first five years, where the statute you can apply you can apply for a tax refund using the direct payment methods. So we know for at least the first five years, we'll be able to get that the timing and the transferability is really that's what we're waiting for that that's what the subject.
The IRS guidance, but what we do know is that it's transferable and that that we will be able to monetize it.
Okay, Great and then just one more for me you know considering the value of the credit here has there been any change to your customer contracts, whether it's the structure or any meaningful change to the pricing is this being considered.
You know and those contracts are so just any update there would be helpful.
I think we're all discussing how that might how that might occur in the future, but it really is considered all in the future just in nothing with any contracts that we have that would be in any way impacted with our backlog.
Okay. The markets all trying to figure out what this what you know what this means because the Oems get some directly they produced in the cells. As you know then there's a whole blade incentive in the tower incentive and then of course, the PTC is a great demand pool.
For the market. So we're all kind of figuring out what it means but theres no doubt its certainly what we've been waiting for as an industry. It really is a positive catalyst for this industry and we're excited about it yeah.
Yeah, no definitely okay, well best of luck and thanks for the questions here.
Thanks, Joe Thank you Justin.
There are no further questions at this time I would like to turn the floor back over to Eric for any closing comments.
Well. Thank you everyone. We appreciate your interest and look forward to coming back to you after our fourth quarter results.
Thank you.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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