Broadwind, Inc. (NASDAQ:BWEN) Q4 2022 Earnings Call Transcript

Broadwind, Inc. (NASDAQ:BWEN) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Greetings, and welcome to Broadwind’s Fourth Quarter and Full Year 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Ciccone, Chief Financial Officer. Thank you, sir. You may begin.

Tom Ciccone: Good morning, and welcome to the Broadwind fourth quarter 2022 results conference call. Leading the call today is our CEO, Eric Blashford, and I’m, Tom Ciccone, the company’s Vice President and Chief Financial Officer. We issued a press release before the market opened today detailing our fourth 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. I would like to inform you that Broadwind intends to file a 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 are participants in the solicitation of proxies from our stockholders in connection with such annual meeting. Stockholders of Broadwind 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, as they will contain important information about the 2023 Annual Meeting, including the identity of the participants in the solicitation and their direct or indirect interest by security holdings or otherwise.

At this time, we will make no further comment on the recent reported nominations made by WM Argyle Fund or any matters or discussions related to the WM Argyle Fund or its purported nominations. 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. I am pleased to report that after a two-year hiatus, we have begun to see green shoots within the domestic onshore wind market. Recent indications of interest from OEM customers, together with continued stability across our diverse non-wind markets, have contributed to improved visibility and optimism across our business in 2023. Given this backdrop, we have reintroduced our past practice of providing full year guidance, which we will touch on shortly. In the fourth quarter 2022, we booked $205 million of new orders, an increase of nearly 270% from the prior-year period, with much of this improvement coming from wind. The recent passage of the Inflation Reduction Act, which includes a 10-year PTC provision, together with the decline in select raw material prices from recent elevated levels, are significant tailwinds for our business.

Operationally, we have made good progress with our continuous improvement efforts, including deploying our innovative QR code technology to provide vital product and process information, including work instructions and video directly to the point of use on the plant floor. This has improved asset utilization, first-time quality, cost and reduced the learning curve on new product rollouts. We optimized the footprint in our Wisconsin facility to reduce material movement and fixed costs, and added new automation capabilities in Gearing to reduce lead times, improve profitability and maintain our industry-leading revenue per head. We also added capabilities to our Industrial Solutions business to open new markets and expand share of wallet on existing accounts.

We are pleased that we’ve been able to develop and retain the key talent required to support the upswing in demand across our markets. We are managing the impacts of cost inflation and taking strategic actions to ensure stable margin capture as we work through some competitively priced wind tower builds in our near-term backlog. We are working with our customers to share inflationary cost increases and our expanding margins on our proprietary products. We are negotiating improved contract terms and prudently managing our cash and liquidity to ensure adequate working capital availability as we grow. We generated revenue of $40 million in the fourth quarter, a year-over-year increase of 54%, with each Broadwind segment posting gains of 40% or more.

We generated $0.2 million of EBITDA in the quarter, an increase of $1.4 million year-over-year, which includes the impact of a lower-margin tower order that we expect to finish during the first quarter 2023. Our Heavy Fabrication segment booked Q4 orders of $184 million, up nearly 500% year-over-year, including the $175 million order received late last year. Our Gearing and Industrial Solutions orders were $15 million and $6 million, respectively, yielding a robust quarter overall from an order standpoint. Our total consolidated backlog at the end of Q4 was $297 million, an increase of 180% versus the prior-year period. Quoting activity in our non-wind markets remain strong, and we expect the good order flow to continue through the balance of this year.

Within our Heavy Fabrication segment, Q4 revenue was $24 million, a 61% increase year-over-year with wind towers and other industrial fabrications posting gains of 55% and 73%, respectively. Importantly, our new proprietary product line, a Broadwind Pressure Reducing Systems, or PRS, which is a vital part of the natural gas virtual pipeline system in North America, comprised roughly 10% of this volume as we execute our strategy to expand in clean fuels. Gearing revenue was $12 million, a 41% 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 commercial strategy as growth in our industrial, mining and steel product lines outpace growth in our oil and gas products.

In summary, I’m pleased with the substantial increase in order activity and backlog we experienced in Q4 as we head into 2023 with much better production visibility across all divisions. With that, I’ll turn the call back over to Tom for a discussion of our fourth quarter financial performance.

Tom Ciccone: Thank you, Eric. Turning to Slide 5 for an overview of our fourth quarter performance. Fourth quarter consolidated sales were $40.1 million compared to $26 million in the prior-year quarter. The 54% consolidated increase in sales was primarily reflective of the improved demand environment, strong recent order intake levels and an improving supply chain. In Q4, we recognized $0.2 million of EBITDA compared to a $1.2 million EBITDA loss in the prior-year fourth quarter. The transition to a profitable fourth quarter is primarily attributable to the higher overall volume level and the corresponding increase in plant utilization, which contributed to improved operating leverage and fixed cost absorption in the period.

Turning to Slide 6 for a discussion of our Heavy Fabrication segment. Fourth quarter orders were $184 million, a nearly 500% increase from the prior-year period. The increase is reflective of the improving demand conditions we’ve experienced due to the tailwinds generated from the recent passage of the IRA as well as the ongoing or planned projects that are near our Abilene facility. I would also like to point out that it appears steel plate pricing has begun to normalize in recent months, which should help project economics. We ended Q4 with nearly $240 million in segment backlog, a $160 million sequential improvement. Fourth quarter sales were $23.7 million, up from $14.7 million in the prior-year quarter. Compared to the prior year, we experienced increases in both tower and industrial fabrication revenue.

Tower sales benefited from the absence of supply chain issues, which hampered deliveries in the prior-year fourth quarter. Industrial fabrication sales benefited from the improved demand from industrial customers as well as for our PRS units. During the fourth quarter, we recognized EBITDA of $0.3 million, an improvement versus the prior year where we were breakeven. Although we produced more tower volume versus the prior year, customer model changes did impact tower production rates in the current year quarter. Turning to Slide 7. Gearing orders continued to be strong in Q4, totaling $15.1 million. Although this represents a decrease of 10% versus the prior-year period, Q4 of 2021 was a modern record for the Gearing segment. Fourth quarter segment sales increased over 40% to $11.7 million versus the prior-year quarter, reflective of the growth we have been experiencing in most end markets.

We generated $0.8 million of segment EBITDA in Q4, an increase of $0.6 million versus the prior-year quarter. Results versus the prior year period were favorably impacted by increased volumes. Full year orders exceeded $53 million, and we ended Q4 with more than $42 million in backlog; both represent the highest levels in recent history. Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions recorded $5.7 million of new orders in Q4. Full year 2022 orders were greater than $20 million for the first time, and we ended the year with a record high $15 million in backlog. This increase was primarily driven by a strong rebound in aftermarket orders with our biggest customer, an indication of increased natural gas turbine upgrades globally.

Fourth quarter segment sales increased to $4.7 million from $3.0 million in the prior-year period, primarily as a result of the strong order intake levels we’ve been experiencing. EBITDA increased to $0.7 million, consistent with the increased sales volume when compared to the prior-year quarter. Turning to Slide 9. Total cash and availability under our credit facility increased significantly during the fourth quarter to more than $40 million. This represents the highest liquidity at Broadwind in nearly a decade. The improved liquidity is the result of improved terms and customer orders with respect to deposits and a testament to the strength of our OEM relationships. As a result of the significant increase in customer deposits, net operating working capital decreased nearly $26 million in Q4 to $0.5 million.

Partially offsetting the deposit impact was an increase in work in progress and finished goods inventory as well as the timing of some large raw material deliveries in advance of 2023 shipments. Looking forward, we expect our operating working capital to increase, primarily in Q1, as our AR balance will become more significant versus where it ended 2022. Finally, as Eric indicated, we are reintroducing our historical practice of providing full year financial guidance. For the full year 2023, we currently anticipate total revenue to be within a range of $200 million and $220 million, and adjusted EBITDA to be approximately $14 million to $16 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.

Eric Blashford: Thanks, Tom. In the near to medium term, we 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. Now that the IRA is law, we believe that this, supported by rising commercial and industrial demand, will drive increased wind installations beginning in 2024. In addition to the positive developments of the PTC extension for wind and the ITC for solar, we await final IRS guidance on the precise treatment of additional incentives in the IRA Act, such as the Advanced Energy Production Credit or Section 45X. This provision creates a new production credit for domestic manufacturers of components relating to clean energy, including our wind power products.

As we look into 2023, we’ve increased visibility and strengthened backlog in each of our operating segments as we build on our legacy in wind to expand into new adjacent clean tech markets, such as clean fuels, solar and power and infrastructure. In our Heavy Fabrication segment, we are adding coatings automation to improve our plant throughput, optimize labor and reduce costs, 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 product strategy, and we plan to introduce both high flow and RNG versions to our offering this year. Given our current capacity, we have the ability to generate approximately $20 million in annual incremental revenue from this product line.

In our Gearing segment, we are seeing success with our efforts to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream. The pace of order growth from industrial, mining and steel processing is significantly outpacing that from our oil and gas customers as per our plan. Skilled labor remains a challenge for us as we expand our force to meet the increasing demand, but we have active, continuous improvement projects in place to address specific bottleneck production areas in our facilities. In summary, I am pleased with the progress our team has made over the last year to build a strong foundation for profitable growth and look forward to capitalizing on improved market demand in the year ahead. As wind and renewables investment activity gradually increases over the coming year, we’ll maintain our facilities, equipment and core talent to support ongoing recovery in order activity.

We will leverage the footholds we have established within wind, clean fuels and power generation, while establishing a present within other complementary market adjacencies such as solar. At the same time, we will seek to drive capacity utilization, margin expansion and reduce net leverage, ensuring continued balance sheet optionality to support the long-term growth of our business. With the successful execution of this strategy, we expect to generate significant growth in both revenue and EBITDA over the next several years as we more fully leverage our NOLs with an emphasis on long-term value creation. 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: Thank you. We will now be conducting a question-and-answer session. Our first question comes from Eric Stine with Craig-Hallum. Please proceed with our question.

Eric Stine: Hi, Eric. Hi, Tom.

Eric Blashford: Hi, Eric.

Tom Ciccone: Good morning, Eric.

Eric Stine: Hey good morning. So, maybe just for me to start, obviously, still early days, but as you said, things starting to pick up in wind. Just curious what type of conversations you’re having now you’ve got the big order, which is effectively filling Abilene. What are the conversations like related to the capacity that’s still available in Wisconsin? And do you kind of have a time frame to when you might start to see that getting filled up as well?

Eric Blashford: Yes. Thanks for the question, Eric. So, as I mentioned on previous calls, it’s going to take some time for the project pipeline to fill back up again in the north, but it is filling up, and we’re excited about that. We are starting tower production in Manitowoc as per that — as for that announcement. And we look to have some subsequent orders to that after we produce that. But I would say early innings, and I would say we should start to see some orders in ’23 and into ’24 for production in ’24 and ’25. I think we’re on an increasing slope as we head into ’25 and ’26.

Eric Stine: Got it. And then, maybe sticking with the IRA, obviously, you’re in the same boat as everyone else awaiting, even though it’s (ph) awaiting guidance from the treasury. So, I just want to be clear, you’re awaiting guidance. In your presentation, you talked about you’re assuming no changes to that guidance. So, I mean, it’s fair to say you are assuming some in your EBITDA guide that would come out of the 45X.

Eric Blashford: Correct.

Eric Stine: Okay.

Eric Blashford: That’s correct, yes.

Eric Stine: Okay. But I mean, I would think it’s not the majority of that number, but it is a factor, at least.

Eric Blashford: That is correct. We are conservative, but we’re following the law, and we understand the statute. And so, in accordance with that, we are including some of that in our projections, yes.

Eric Stine: Understood. And then, maybe just sticking with that. When you think about that credit, there’s also credits for everyone basically. I mean, is it still kind of the thought that, because you’ve got credit for towers and blades and then the seal, that this is something that you potentially are able to keep in full rate rather than having to share given that there are credits in all these other areas?

Eric Blashford: We certainly are leaning that way. We think in the out years, I think in the early years, we’ll be able to keep more than I think in the out years or maybe some negotiation, if there’s a project-specific site or something that gets more competitive, our customers may ask us to share some of that. We’d certainly consider it. But in the early years, Eric, we intend to retain that and use it for the purpose it’s intended for, which is to improve our business.

Eric Stine: Yes. Got it. Okay, I’ll take the rest offline. Thanks.

Eric Blashford: Thank you.

Tom Ciccone: Thanks, Eric.