Broadwind Inc. Q1 2023 Earnings Call
Speaker 2: 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Chaconi.
Speaker 2: Thank you. You may begin. Good morning, and welcome to the Broadwind first quarter 2023 results conference call.
Speaker 3: Leading the call today is our CEO Eric Blashford, and I'm Tom Ciccone, the company's Vice President and Chief Financial Officer.
Speaker 3: We issued a press release before the market opened today detailing our first quarter results.
Speaker 3: 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.
Speaker 3: Although these forward-looking statements are based on management's current expectations and beliefs,
Speaker 3: Actual results may differ materially.
Speaker 3: For 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.
Speaker 3: Additionally, please note that you can find reconciliation of the historical non-GAAP financial measures discussed during our call in the press release issued today.
Speaker 3: I would like to inform you that Broadwind filed its definitive proxy statement and related proxy materials with the SEC in connection with the 2023 Annual Meeting of Stockholders and in connection therewith its directors and certain of its Executive Officers.
Speaker 3: are participants in the solicitation of proxies from our stockholders in connection with such annual meeting.
Speaker 3: Stockholders abroad when are strongly encouraged to read such proxy statement and all other related materials filed with the SEC carefully and in their entirety when they become available, they will contain important information about the 2023 Annual Meeting, including the identity of the participants in the solicitation and their direct
Speaker 3: indirect interest by security holdings or otherwise.
Speaker 3: At this time, we will make no further comment on the nominations made by the W.M. Argyle Fund or any matters or discussions related to the W.M. Argyle Fund or its nominations. At the conclusion of our prepared remarks, we will open the line for questions.
Speaker 3: With that, I'll turn the call over to Eric.
Speaker 4: Thanks, Tom, and welcome to those joining us today.
Speaker 4: Our first quarter results
Speaker 4: demonstrate a strong start to the year.
Speaker 4: as sustained demand across diverse end markets.
Speaker 4: improved margin realization, and consistent operational execution contributed to significant year-over-year growth and profitability.
Speaker 4: The green shoots first evidenced as we exited last year continued into the first quarter.
Speaker 4: as indications of interest from OEM customers, together with continued stability across our diverse non-wind markets.
Speaker 4: have contributed to improved visibility and optimism across our business in 2023 and into 2024.
Speaker 4: We've recently announced several significant new business wins.
Speaker 4: including the $175 million in new tower orders.
Speaker 4: followed by a record $8 million order for our proprietary mobile pressure reduction systems or PRS's.
Speaker 4: and related accessories in April .
Speaker 4: These orders reflect positive business momentum within our legacy wind business, together with significant traction within new, higher margin adjacent markets that leverage the unique intellectual property we are developing here at Broadwind.
Speaker 4: Importantly, this performance reflects meaningful progress on a strategic plan, which emphasizes profitable growth across a broader spectrum of energy transition and clean tech opportunities.
Speaker 4: as we further expand our product and service capabilities.
Speaker 4: We expect to drive improved asset utilization and unit economics consistent with our focus on driving improved margin realization through the cycle.
Speaker 4: We booked $40 million in orders in the first quarter, down about 25%.
Speaker 4: from the prior year quarter as expected, given the pull forward of the large multi-year tower order we received in December 2022.
Speaker 4: The timing of these tower orders was partially offset.
Speaker 4: by a more than 100% increase in our industrial fabrications orders, which include our proprietary PRS product line. Entering the second quarter, we continue to operate on plan, both at a commercial and an operational level.
Speaker 4: Commercially, we are staying disciplined on price as we pass along inflationary cost increases to our customers.
Speaker 4: We are also negotiating improved contract terms and prudently managing our cash and liquidity to ensure adequate working capital availability as we grow.
Speaker 4: We're also focusing on expanding our product mix within higher margin or profitable adjacent markets as reflected by our recent PRS product launches.
Speaker 4: Operationally.
Speaker 4: We continue to deploy lean operating principles across the organization.
Speaker 4: including continuous improvement projects across all divisions, with an emphasis on improved asset utilization.
Speaker 4: We've continued to focus increasingly on plant and process automation, positioning us to capture improved manufacturing efficiencies.
Speaker 4: This year, we've led a major retooling and automation of our coatings process at the Abilene plant.
Speaker 4: which is expected to be fully operational at the end of May 2023.
Speaker 4: We generated revenue of $49 million in the first quarter, a year-over-year increase of 17%, with each reporting segment posting double-digit gains.
Speaker 4: We generated $4.1 million of adjusted EBITDA in the quarter, an increase of more than $4 million versus the prior year period.
Speaker 4: resulting in a return to profitability in the period.
Speaker 4: Our heavy fabrication segment booked Q1 orders of $20 million, down 41% year-over-year as expected.
Speaker 4: given that we received the $175 million multi-year tower order late last year.
Speaker 4: We're pleased to see increasing strength in our industrial fabrications product line, with orders more than doubling year over year.
Speaker 4: Our gearing orders were $12 million, down 12% year over year.
Speaker 4: led by softening of incoming oil and gas orders, partially
Speaker 4: offset by increases in orders from the industrial and steel processing sectors.
Speaker 4: Orders for industrial solutions of $7 million continue to be strong, posting a 56% increase year-over-year led by orders for both new gas turbine builds, as well as the gas turbine aftermarket.
Speaker 4: Our total backlog at the end of Q1 was $288 million.
Speaker 4: a 146% increase versus a prior year period.
Speaker 4: Quoting activity in our non-wind markets remains strong, and we expect good order flow to continue through the balance of this year.
Speaker 4: Within our heavy fabrication segment, Q1 revenue was $32 million, a 16% increase year-over-year with wind towers and other industrial fabrications, posting gains of 12% and 31% respectively.
Speaker 4: Importantly, our new proprietary product line, the Broadwind Pressure Reducing System, or PRS,
Speaker 4: which is a vital part of the natural gas virtual pipeline system in North America continues to perform well with revenues up 65% year-to-year as we execute our strategy to expand in clean fuels.
Speaker 4: Gearing a revenue was $12 million, a 13% increase year-over-year, thus customer activity continues to be strong.
Speaker 4: within both the energy and industrial sectors.
Speaker 4: We are seeing the positive impact of our commercial strategy given 165% year of year growth in our industrial segment this quarter.
Speaker 4: In summary, I am pleased with the operating performance of all divisions entering the year as we continue to execute our growth and diversification strategy.
Speaker 4: With that, I'll turn the call back over to Tom for a discussion of our first quarter performance.
Speaker 3: Thank you, Eric. Turn to slide 5 for an overview of our first quarter results.
Speaker 3: We had a strong first quarter performance with consolidated revenues of $48.9 million compared to $41.8 in the prior year quarter.
Speaker 3: The 17% increase was primarily reflective of the sustained demand strength and strong operational execution across our diverse end markets.
Speaker 3: Each of our operating segments generated year-over-year growth in both revenues and operating income.
Speaker 3: In Q1, we recognized $4.1 million of EBITDA compared to break-even EBITDA in the prior year first quarter. Our strong EBITDA performance and improved margin realization is primarily attributable to the higher overall volume level and the benefits attributable to the Advanced Manufacturing Production Tax credits, or AMP, credits.
Speaker 3: We are in this quarter associated with our wind tower production. The AMP credits were introduced as part of the Inflation Reduction Act.
Speaker 3: which was enacted into law in 2022. The IRA provides for manufacturing tax credits associated with eligible wind and solar components.
Speaker 3: Manufacturers qualify for these credits based on the electricity output for each component produced and sold in the U.S. starting in 2023. It is also important to point out that we generate GAP net income of $800,000, or 4 cents per diluted share in the first quarter. After adjusting for the $700,000 of proxy contest related costs, we can see that the total cost of the $800,000 is $3.5 million.
Speaker 3: We generated 1.5 million of net income or 7 cents per dulyted share. Turning slide 6 for discussion of our heavy fabrication segment. First quarter orders were comparatively limited at 20.2 million, a decrease from the prior year period, and sequentially.
Speaker 3: This decrease is attributable to the timing of the large multi-year 175 million dollar tower order that was received late in 2022. Based on the timing of this order and the resulting near record backlog that we've carried since year on, we expected orders to be limited when compared to prior periods or order intake levels reflected a more consistent project by project timing.
Speaker 3: First quarter revenues with 31.6 million up from 27.3 million in the prior year quarter. Although we sold less power sections versus the prior year period, we realized an increase in wind power revenue as we had less customer supply material and increased steel costs, which is generally a pass through to customers.
Speaker 3: In addition, we recognize a 31% increase in industrial fabrication product line revenue due to increased demand for mining customers as well as for our PRIS units in the current year quarter.
Speaker 3: During the first quarter, we recognized EBITDA of $3.9 million, an improvement of $3.3 million versus the prior year period, primarily driven by the AMP credits recognizing the current year period, as well as the increased industrial fabrication and product line revenue.
Speaker 3: During the slide 7, gearing orders continue to be strong in Q1, totaling 12.4 million. This represents a decrease versus the prior year first quarter, but remains on pace with a $13 million quarterly average experience during 2022.
Speaker 3: Backlog increased again in Q1 and the resulting balance represents the highest reported level in recent history. Compared to the prior year first quarter, segment revenues increased 13% to 12 million, reflective of the comparatively stronger backlog that we enter 2023 with.
Speaker 3: We generated 1.3 million of segment EBITDA in Q1, an increase of 0.8 million versus the prior year quarter, a result of the additional revenue, a more profitable mix of product sold, and the lack of ramp-up cost incurred in the prior year.
Speaker 3: Turning to slide 8 for discussion of our industrial solution segment. Industrial solutions recorded $7 million in new orders in Q1. This represents a 2.5 million or 56 percent increase versus the prior year first quarter. We ended the first quarter with a record high $17 million in backlog.
Speaker 3: as we continue to see strong demand for our core natural gas turbine offerings. First quarter segment revenue has increased to 5.4 million from 4.1 million in the prior year period. You primarily do the strong order intake levels we've been experiencing and a large shipment from international customer.
Speaker 3: EVITA increased to 0.8 million, consistent with the increased revenue, as well as an improved mix of products sold when compared to the prior year quarter.
Speaker 3: EBITDA increased to 0.8 million consistent with the increased revenue as well as an improved mix of products sold when compared to the prior year quarter.
Speaker 3: Our quarter and liquidity remains adequate with cash and availability under our credit facility of $12.3 million. As noted during the Q4 results conference call, we expected our offering working capital to increase in Q1 as a result of higher AR and inventory balances consistent with the increased production levels as well as deposit balances decreasing to our new normalized offering levels. As such, we saw offering working capital increased sequentially.
Speaker 3: which was funded by Arlanta Credit.
Speaker 3: We don't anticipate any further significant increases in operating work in capital for the balance of the year. It should be noted that the AMP credits are not part of our traditional operating work in capital calculation, but we do expect this receivable.
Speaker 3: anticipate any further significant increases in operating work in capital for the balance of the year. It should be noted that the AMP credits are not part of our traditional operating work in capital calculation, but we do expect this receivable balance to increase during the year.
Speaker 3: Finally, as we announced on April 20th, we are affirming our full year financial guidance.
Speaker 3: For the full year 2023, we currently anticipate total revenue to be within a range of $205 and $220 million and adjusted EBITDA to be approximately $16 to $18 million. That concludes my remarks. I will turn the call back over to Eric for an overview of end markets and the overall financial situation. Thank you for your attention.
Speaker 4: in addition to some concluding remarks. Thanks, Tom. In the near to medium term, we continue to view the Inflation Reduction Act of 2022 as a significant positive catalyst for the wind sector as it provides the long-term policy certainty long-awaited by developers. We believe that the IRA, supported by rising commercial and industrial demand, is a priority.
Speaker 4: will support ratable growth in new wind installations beginning in 2024.
Speaker 4: Even as we await final IRS guidance, we are seeing renewed confidence at our wind customers, given expectations for a more stable industry growth over the next decade.
Speaker 4: The AMP credits included in the IRA create a new production credit for domestic manufacturers of components relating to clean energy, including our wind tower products. As we look forward to the balance of 2023,
Speaker 4: and into the next year, we have increased visibility and a strengthened backlog in each of our operating segments.
Speaker 4: as we build on our legacy in wind to expand into new adjacent cleantech markets such as clean fuels, solar, and power and infrastructure. As mentioned earlier, in our heavy fabrication segment, we are adding coatings automation to improve our plant throughput, optimize labor, and reduce costs.
Speaker 4: as we continue to work with our customers to book capacity for towers and other industrial fabrications for 2023 and beyond. The line of proprietary pressure-reducing systems introduced last year is progressing as per our strategy, and we're pleased with the favorable market response and order activity we've received.
Speaker 4: for the new high flow model released this year.
Speaker 4: We've also introduced a rental option for these units in response to customer demand.
Speaker 4: Given our current capacity, we expect to generate approximately $20 million in annual incremental revenue from this product line by 2025 at attractive margins.
Speaker 4: to achieve a more balanced revenue stream going forward.
Speaker 4: Order growth from industrial and steel processing segments has been strong, and we're seeing good response to our increased focus on gearbox repair and refurbishment services. And finally, our strategy to add process capabilities to our industrial solutions business, to expand our share of wallet within existing accounts, while penetrating new ones and improve margin profiles is yielding desired results.
Speaker 4: Root-nally-Maintainer Facilities, Equipment, and Vital Core Talent Positions us well to support an ongoing recovery in order activity.
Speaker 4: We will leverage the presence we have established within wind, clean fuels and power generation.
Speaker 4: while establishing footholds within other complementary market adjacencies such as solar. Concurrently, we will drive capacity utilization, margin expansion, and reduce net leverage ensuring continued balance sheet optionality to support the long-term growth of our business.
Speaker 4: With a successful execution of our strategy, we expect to generate significant growth in both revenue and income over the next several years as we more fully leverage our NOLs.
Speaker 4: With a successful execution of our strategy, we expect to generate significant growth in both revenue and income over the next several years as we more fully leverage our NOLs, with emphasis on long-term value creation.
Speaker 4: With that said, I will turn the call over to the moderator for the Q&A session. Thank you. At this time we'll be conducting a question and answer session.
Speaker 2: If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker 2: Our first question comes from Eric Stein with Craig Hallam. Please proceed with your question. Hi Eric. Hi Tom. Hi Eric. Hi Tom. Hi Eric. Hi Tom. Hi Eric. Hi Tom. Hi Eric. Hi Eric. Hi Tom.
Speaker 2: Our first question comes from Eric Stein with Craig Hallam. Please proceed with your question. Hi Eric. Hi Tom. Hi Eric. Good morning.
Speaker 4: Good morning. So curious if you could talk a little bit about you know the large win contract presumably the business that you did in Q1 is really business secured in mid-22 or potentially an early 22.
Speaker 4: So I just want to confirm that but then also just think about any more clarity as the year progresses on when you expect that large contract to start up and when it does is it still the view that it would be ratable through the end of 2024.
Speaker 4: Yeah, orders against that particular larger order will begin producing in Q3, and they'll last all the way through the end of 2024.
Speaker 4: Yeah, orders against that particular larger order will begin producing in Q3 and they'll last all the way through the end of 2024. Radably, to your point, yes.
Speaker 4: Got it. And then, you know, you talked, I guess in the past you've gotten into the forward corridor. And I know that, you know, you've talked about having better visibility, you know, better than you've ever had. You know, just curious. And that really speak tight to those kids you're seeing right now.
Speaker 4: Any color you can provide on Q2 and maybe just linearity versus Q1, and then also any chance you can talk about the mix of wins, since that's obviously going to dictate the credit that you would recognize in the quarter. I think for Q2, we're going to see consistent with Q1, the mix.
Speaker 4: to make sure it also be consistent. We were able to pull a little bit of towers into Q1.
Speaker 4: This robot, this coding automation that we were putting in this year, we elected to put that in Q2 instead of Q1, so it pulled some orders into Q1. But I do expect it to be consistent with Q1. Okay, with a little less wind, just to be clear.
Speaker 4: A little less wind, yes.
Speaker 4: Little less when yes. Okay, all right, no, it's fair.
Speaker 4: I appreciate that. And then maybe just sticking with wind, it sounds like in your commentary, you're talking about...
Speaker 4: 24 in terms of maybe an uptick in orders there. I mean, instead of that kind of implies that for the Manitalk facility that it's still early in the wind recovery, that that's kind of the time frame when you might expect some orders that would fill up that facility.
Speaker 4: Yeah, I would say we're, I would call it the early innings.
Speaker 4: As I mentioned before previous calls, the south has been hotter than the north and the north is starting to heat up.
Speaker 4: mentioned before previous calls, the south has been hotter than the north and the north is starting to heat up but it will take some time so I...
Speaker 4: I think you're correct and in 2014 we'll start seeing some orders consistent with the overall growth and installation expectations of the wind market.
Speaker 4: Yes, no understood. Great color, I guess. Maybe this last one for me just for Tom on working capital. You know, I given kind of what you're talking about in terms of free cash flow and $6 million in capex for the year implies
Speaker 4: that not only does it stay flattish or that you actually start to get worth and capital benefit.
Speaker 3: As the year progresses, so I mean any any color you can provide in terms of you know how that might hit throughout the year Yeah, no, I think I think we've seen the significant increase in working capital that we projected Kind of plateau now at the end of Q1, so I don't expect a lot of
Speaker 3: significant movement for the balance of the year. There may be some ebb and flows within the quarters, but I think it'll be pretty stable throughout the balance of the year. I think the balance of our free cash flow will come from our earnings. So there might be some small benefit to working capital, but I think it's mostly on the cash that we'll generate. Mm-hmm.
Speaker 2: Okay, all right. Thanks for the color. Thanks, Eric. Thanks, Eric. Our next question is from Justin Clare with Roth MKM. Please proceed with your question.
Speaker 4: Yeah, good morning. Thanks for taking our questions. Hey Justin, good morning. So just to start off here on the manufacturing credits, it looks like you secured just over 3 million in the advanced manufacturing credits in Q1. I know we're still waiting on
Speaker 4: And then maybe if you just talk more broadly about where you might need more clarity from the Treasury on those manufacturing credits. Yeah, thanks Justin. So at this point if we do nothing, we won't be able to monetize those until 2024 when we file our...
Speaker 3: our year-end tax return for 2023. So, you know, we've talked to several people about the potential monetization of these credits.
Speaker 3: There's just an unwillingness to do anything until the IRS comes out with their guidance regarding this. We don't know what it's going to look like, what the transfer, if there's some certificate that's issued. So, everyone's kind of in a waiting game to see when that comes out. But, you know, this is a long-term credit so that, you know, the market is going to be patient.
Speaker 4: the component manufacturers, but there is this question about domestic content, some labor contributions that I think overall could impact developers and I think that's what's causing a bit of a pause.
Speaker 4: Okay, got it. Yeah. So, maybe you could speak to that a little bit more. We are waiting on domestic content and the manufacturing credits in terms of the guidance from Treasury. Is that having a meaningful impact on your customers and developers? Are we seeing developers maybe put a pause on projects until there is more clarity?
Speaker 4: Yeah, I think the answer is a little of both. I mean, the market is seeing increased activity, as evidenced by some of the orders announced by us and by others. But I do believe there's still some hesitancy as we await the final guidance. Justin, there may be projects that are just kind of...
Speaker 3: the bubble if you will and in this guidance might help justify them a little bit more than than others. So I think it's the answer is a little bit of both. We're definitely seeing some exuberance in the market but there could be some pause. I'm waiting.
Speaker 4: Gotcha okay and then I know you've spoken a good amount about cash flow through the year and you're working capital here but just wanted to ask you know is there potential that you may need to build inventory as we move through the end of this year here in anticipation of
Speaker 4: pick up in early 2024, you know, what kind of visibility do you have right now into, you know, potentially increasing utilization in that early part of the year in 2024 or is it more likely that we see a greater ramp later in 2024 and into 2025.
Speaker 3: I think the latter. I think, you know, we're not inventory will ebb and flow. Again, our working capital ebb and flow, but...
Speaker 3: inventory will ebb and flow, again our working capital will ebb and flow, but
Speaker 3: We just don't think it's going to be a significant factor for the balance of this year at least. That may be more of a factor towards the end of 2024, I would think.
Speaker 2: Okay, great. Thank you. Thanks, Justin. Our next question is from Omit Dale with HC Wainwright. Please proceed with your question. Thank you. Good morning, guys. Good to see the execution. Good morning. Good morning, man.
Speaker 5: Hi, so just on the credit topic, right? Are you expecting to accumulate these credits at a similar run rate that you saw in the first quarter for the remainder of the year?
Speaker 3: I would say yes, they're ratable. They do as a reminder, they're calculated based on the capacity factor of the turbines we're building for, but there is a range that we think we're going to be building within, so I think yes, given that range, it should be ratable for the rest of the year. The only thing I would add to that is that some of the tower designs that we're producing we won't know about right away. So there's plenty of information, but between 80 and 12kfrontgeclouds.com. You can't cook them across the house so this is a requires that you fortified the ref5 if I don't do it with wine here, If I chicken Clove cases the ref5 referenced like big! Well, I think we're gonna move on. So that is another layer that we need to take a look and what we're gonna do is build a FEMA way that's pretty impressive.
Speaker 5: relative to our expectations. I'm just wondering if...
Speaker 5: there is room for further upside on the gross margin side given you know the new product mix or is this the level at which you probably will be for the rest of the year?
Speaker 4: Well I think we saw a little bit of enhanced capacity utilization because we were able to pull orders in, production into the quarter through good execution, but I think from a gross margin standpoint it would be relatively stable for the rest of the year. Okay, thank you.
Speaker 5: And then just last one for me on the 8 million PRS order, could you talk a little bit about what type of customers you cater to with this offering and what the opportunity looks like for you.
Speaker 4: Yeah, those units go into what we call the virtual pipeline, which is the process of taking fuel gas, natural gas, from its point of origin source, compressing it, and then taking it to a point of use where it would be not subject to pipeline service.
Speaker 4: and then decompressing on the other end. And we support the equipment for the decompression of the pressure reduction at the end. So we are selling these things to purveyors of natural gas. They tend to be working the... They sell the gas to users of the gas.
Speaker 5: at the point of use, and they use our equipment to do that. Okay, understood. That's all I have guys. I will follow up with you later on. Thank you. Sure, thanks a lot. Thanks a minute.
Speaker 2: We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.
Speaker 2: Yes, thank you. We appreciate your interest in Broadwind. We're excited for the way our year started and we look forward to coming back to you after Q2. So give a report then. Thanks everyone. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.