Broadwind, Inc. (NASDAQ:BWEN) Q3 2023 Earnings Call Transcript

Broadwind, Inc. (NASDAQ:BWEN) Q3 2023 Earnings Call Transcript November 13, 2023

Operator: Greetings, and welcome to Broadwind’s Third Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Ciccone. Thank you. You may begin.

Tom Ciccone : Good morning, and welcome to the Broadwind third quarter 2023 results conference call. Leading the call today is our CEO, Eric Blashford; and I’m Tom Ciccone, Broadwind’s Vice President and Chief Financial Officer. We issued a press release before the market opened 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.

Eric Blashford : Thanks, Tom, and welcome to those joining us today. We delivered a strong third quarter performance, yielding significant year-over-year increases in revenue, net income, margin realization and adjusted EBITDA. We generated double-digit revenue growth year-over-year in all segments, with our largest segment, Heavy Fabrications realizing 25% revenue growth due to improved demand for wind tower sections, augmented by shipments of our new high-flow natural gas pressure reduction systems, or PRSs. Our results benefited from a combination of improved operating leverage, price discipline, a higher value sales mix and improved process efficiencies, including early benefits from our recent investments in coatings automation and well prep technology.

These actions, plus the benefit provided by the IRA’s advanced manufacturing tax credit, resulted in adjusted EBITDA of more than 13%, an improvement of over 900 basis points versus Q3 2022. Continued stability across our wind and diverse non-wind markets has contributed to improved visibility across our business as we look to the remainder of this year, leading us to reaffirm our adjusted EBITDA guidance for the full year 2023. We booked $16 million of orders in the third quarter, down from $84 million in the prior year due primarily to the timing of tower orders as a major customer placed a large longer-term order in late 2022 that pulled forward what had historically been a series of smaller ratable orders. Partially offsetting this decline in tower orders was a 47% increase in industrial fabrication orders, primarily from the mining sector.

Gearing orders were down approximately 80% from the prior year due to reduced demand from oil and gas and industrial customers, while orders within our Industrial Solutions segment declined 20% due to the timing of demand for new gas turbine content. Entering the fourth quarter, we continue to operate on plan. We’re focused on expanding our product mix within higher-margin adjacent markets, both the development of our low-flow PRS unit, including an RNG version on track for release in 2024. We are also continuing with our new technical advisory sessions during which we provide our gearing customers with on-site diagnostic, maintenance and service training to help optimize the performance, reliability and longevity of their equipment. These sessions have led to increased repair and replacement service orders from both new and existing Gearing customers.

Operationally, the lean operating principles, process controls and continuous improvement projects we’ve implemented at all locations are showing good results in asset utilization and productivity. Our relentless focus on team member safety, quality systems and skills training has allowed us to continually meet the quality and delivery performance much valued by our customers. We generated total revenue of $57 million in the third quarter as we experienced increases in all divisions. We generated $7.6 million of adjusted EBITDA in the quarter, an increase of approximately $5.7 million versus the prior year period, continuing the strong performance we’ve seen this year so far. Our consolidated backlog at the end of Q3 was approximately $220 million, up $89 million from the prior year period.

Quoting activity in our non-wind markets remain stable, and we expect good order flow to continue through the balance of this year, notwithstanding the softness in the oil and gas gear market. Within our Heavy Fabrications segment, Q3 revenue was $38 million, a 25% increase year-over-year, led by increases in wind tower sales and our proprietary natural gas pressure-reducing systems, offset by reductions in our mining, construction and industrial markets. Gearing revenue was $11 million, a 12% increase year-over-year as customer activity continues to be strong within both the industrial and steel sectors. Industrial Solutions revenue was $7 million, up 85% year-over-year, led by increases in new gas turbine content to both domestic and international customers.

In summary, I’m pleased with the operating performance of all divisions through the third quarter and look forward to continuing this momentum through the remainder of the year as we continue to execute our strategy. With that, I’ll turn the call over to Tom for a discussion of our third quarter financial performance.

Tom Ciccone : Thank you, Eric. Turning to Slide 5 for an overview of our third quarter performance. We had a strong third quarter. We experienced both sequential and year-over-year growth in revenue, gross margin and EBITDA. In Q3, we recognized $7.6 million of EBITDA compared to $1.9 million in the prior year third quarter. The $5.7 million EBITDA increase and improved margin realization is due primarily to the benefits attributable to the advanced manufacturing production tax credits or AMP credits we have been earning this year associated with our wind tower production together with solid overall operational execution. We generated net income of $4.4 million or $0.20 per diluted share in the third quarter. Turning to Slide 6 for a discussion of our Heavy Fabrications segment.

Third quarter revenues were $38.3 million, up both sequentially and versus the prior year quarter. We recognized 190 tower sections in the current year quarter versus 138 in Q2 and 145 in the prior year third quarter. These increases were largely driven by the 42-tower section sold from our Manitowoc facility which had lower sections sold in the comparable periods. During the third quarter, we recognized segment EBITDA of $6.9 million, an improvement of $5.4 million versus the prior year period, primarily driven by the increased tower sections sold and the AMP credits recognized in the current year period. Turning to Slide 7. Gearing orders slowed significantly in Q3 totaling $3 million, a $12.5 million or 81% decrease versus the prior year quarter.

The majority of the decrease was attributable to the reduction in oil and gas demand that we’ve been experiencing. Segment revenue was $11.4 million, up $1.2 million compared with the prior year third quarter, but EBITDA decreased $300,000 to $0.9 million due to a less profitable mix of products sold and higher overhead costs when compared to the prior year quarter. Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions had a strong third quarter with the highest revenue total since Broadwind’s acquisition of Red Wolf in early 2017. While orders of $4.9 million are down both sequentially and versus the prior year third quarter, our backlog of $15.4 million still remains at an elevated level and represents the third highest quarterly total since acquisition.

We continue to see strong demand for our core natural gas turbine offerings. Third quarter segment revenues increased to $7.4 million from $4 million in the prior year period, reflective of the record high backlog we entered the third quarter with. EBITDA increased to $1 million from breakeven in the prior year period, consistent with the increased revenue as well as a more profitable mix of products sold when compared to the prior year quarter. Turning to Slide 9. Our quarter-end liquidity remains adequate with cash and availability under our credit facility of nearly $14 million. During Q3, we did see a significant increase in our net operating working capital of just over $7 million, due primarily to an increase in AR as we changed billing and collection terms with a major customer and because of the significant sales in September, the largest month year-to-date.

During the fourth quarter, we expect operating working capital balances to decrease, and as a result, we will be carrying lower debt. As a reminder, as I pointed out in the past few quarters, it should be noted that the AMP credits are not part of our traditional operating working capital calculation, and we do expect this receivable balance to continue to increase until monetized. At the end of the third quarter, our AMP credit receivable totaled more than $11 million, representing credits earned under the IRA. We are currently evaluating the sale of these earned credits to unaffiliated institutional third parties, an approach which if pursued would accelerate monetization of these credits during 2024. Finally, as Eric mentioned, we are reaffirming our full year revenue and adjusted EBITDA guidance at this time, positioning us for a strong finish to the year.

That concludes my remarks. I will turn the call back over to Eric to continue our discussion.

Eric Blashford: Thanks, Tom. Now allow me to provide some thoughts entering 2024, first beginning with our Heavy Fabrications segment. In January 2023, you’ll recall that we announced we’d entered into a supply agreement for wind tower purchases valued at approximately $175 million with a leading global wind turbine manufacturer. Under the terms of the supply agreement, order fulfillment is to occur beginning in 2023 through year-end 2024. In early November 2023, the parties discussed their joint intent to shift approximately half of the contracted tower section orders initially planned for 2024 into 2025 while maintaining the total number of tower sections stipulated under the supply agreement. Importantly, this shift will still allow us to support a ratable base level of tower production into 2025.

In our Gearing segment, average to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream going forward remain important for us, and we’ve reorganized our commercial team to accelerate this transition. Additionally, in the latter part of Q3, we took actions to reduce overhead costs in response to the reduction in demand from the oil and gas market while further leveraging our investments in automation made over the last several years. In Industrial Solutions, we continue to add process capabilities to equip us to grow our share of wallet with existing accounts while adding new ones. We’ve upgraded our in-house engineering capabilities and plan to add plasma cutting and CNC machining over the next several months to continue our growth in power generation, renewables and other markets.

I’m pleased that we booked more than $1 million of wind and solar orders in this business through Q3 and have continued interest from the wind repowering market, which we anticipate will yield additional orders for this division. In summary, I’m pleased with the strong operational performance from our team so far this year, including the good result we achieved in Q3. We continue to focus efforts to build a solid foundation for steady, profitable growth, serving the energy transition and other key markets and look forward to capitalizing on improved market demand in the years ahead. We will prudently maintain our facilities, equipment and control overhead costs while we invest in the vital core talent needed to grow our business as we leverage our presence in renewables, clean fuels and power generation while establishing new footholds within other complementary markets such as energy transition.

With that said, I will turn the call over to the moderator for the Q&A session.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Eric Stine with Craig-Hallum.

Eric Stine : Maybe if we could just start with the guidance. So just trying to figure out or talk about what is implied from the — or in the fourth quarter. I mean, it’s a pretty wide range. It would also seem to imply that you don’t have a whole lot of wind activity, given the EBITDA number that’s implied. So maybe, I mean, it is a wide range. Could you just talk about what the factors would be to get you to the low end or the high end of that range and some things consider as we think about Q4?

Eric Blashford: Yes. Well, I think first of all, we tend to be conservative as management and we’ll always be conservative as management. There’s some trepidation with the oil and gas market as we have customers requesting for pushouts, and we’re negotiating with those customers to include most of that in 2023 as we can. So that’s the reason for — a primary reason for our caution and reaffirming our guidance for 2023.

Eric Stine : And then is that fair to say though, I mean, given the EBITDA, and I get it about being conservative, but given I guess, implying breakeven to positive $2 million, I mean, that would seem to say that you have a lower or much lower level of wind activity, tower activity in Q4. Is that the correct way to think about it?

Eric Blashford: Well, it’d be lower than Q3 because we finished — we had multiple tower orders that we finished in Q3. There would be lower activity in Q4 than in Q3 but not de minimis. So please take that as a conservative estimate.

Eric Stine : Okay. No. I guess okay. Yes, that makes sense. Maybe then just turning to the decision with your large customer to just kind of adjust the timing of the tower order. Curious, I mean, I know that was going to be recognized ratably third quarter, fourth quarter and throughout ’24. I mean, is it as simple as taking that — what the quarterly run rate number would be and cutting it in half? And then also, now you would seem to have some open capacity in Abilene, and given that, that’s a very good location, is there a possibility that you are able to fill some of that?

Eric Blashford: Sure. I mean, while we — while 50% capacity utilization is preferred to 25% divided by 2 years, as an operator, 25% of lease gives us that ratable volume as we talked about before, Eric, across the whole year and for 2025 as well. And you’re correct. Now that we have open capacity or more open capacity in that plant, we’ll certainly market it to the other OEMs. Remember, there are 4 OEMs. This was 1 of the 4 and the other 3 are still viable to get orders from for that same time period. So yes, our mission is, as it always has been, to fill that capacity.

Eric Stine : Got it. And last thing. Just the commentary, I guess, Industrial Solutions more positive than Gearing. I mean, without kind of asking for a number, I mean, directionally, as you sit here today and some of the cost cuts that you’ve taken in Gearing, I mean, is that a potentially down year in ’24 and Industrial Solutions would potentially be flat to up?

Eric Blashford: Yes. I would say that’s a good estimate. I mean, our Gearing business is the most diverse but it’s full of industrial markets. And frankly, as interest rates continue to rise as the Fed continues to try to control inflation, it does and can have an impact on those industrial markets. On the other hand, Industrial Solutions, if you remember, is an international company. We ship both domestically and internationally. So some of the domestic drivers such as interest rates, inflation, don’t necessarily impact international. So I would say that would be a good estimate, Eric.

Operator: Our next question comes from Amit Dayal with H.C. Wainwright.

Amit Dayal: Eric, with respect to the pipeline in the different segments, could you give us some sense of what you are working with right now?

Eric Blashford: Pipeline. If I start with Industrial Solutions, you’re talking about pipeline of potential orders?

Amit Dayal: Yes, yes. Sales pipeline and what you see there. Is there any large potential. I’m just trying to get a sense, you had this big order last year. Is there something like that in this pipeline going forward?

Eric Blashford: Okay. If you’re talking about wind, I wasn’t sure if you — so in terms of wind —

Amit Dayal: Yes, wind or industrial. Any color [indiscernible].

Eric Blashford: Okay. Let me start with wind. Wind, it’s — as I’ve mentioned before, notwithstanding large orders, which we had received and our competition had received, the general other OEMs continue with their ratable PO to PO type of bids and orders and those continue. So I’d say the pipeline would be normal. There is a general, I’d say, slowness in the market. As expected, we said that 2024 would be a transition year and 2025 and ’26 and beyond would be much stronger that — so the Wood Mac and some of our exhibits indicate that. So that is as expected. We still believe the IRA is going to generate the long-term exuberance in the wind market as anticipated. So there’s your answer for that market, for your wind market.

For Industrial Solutions, which is the natural gas turbine market, that actually looks bullish. Natural gas turbine sales across the world, this year, I think are the second highest since we did the acquisition. So we do expect a good order flow from that business through the next year to 18 months. And within Gearing, as I mentioned, Gearing is our most diverse business. They service industrial markets such as oil and gas, as I mentioned before, marine, steel, material handling. Those markets are subject to, I think, some interest rates dampening of demand. But yet, we do have strong order input — I’m sorry, quote input in our quote so we think we’re going to win. So I’d expect a softer year in 2024 than 2023 but certainly not materially down at this point.

Amit Dayal: Okay, all right. And then from a raw material cost perspective, what are you seeing in terms of potential increases on that front and impact from any of those types of increases on margins going forward?