Broadwind, Inc.

Hey, good morning, and welcome to the Broadwind third quarter 2021 results conference call. Leading the call today is our CEO, Eric Blashford, and I'm Tom Ciccone, the company's vice president and principal accounting officer. We issued a press release before the market opened today detailing our third quarter 2021 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 factor sections 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.

Thank you, Tom, and welcome to those joining us today. During the third quarter, our team successfully navigated a variety of external challenges while continuing to support our wind OEM customers during a transitional period. Over the near term, our industry is grappling with a fluid policy backdrop, higher raw material costs, and continued supply chain disruptions. The net impact has been that onshore wind developers have paused activity as they await more certainty around these and related issues, with specific emphasis on the structure and duration of a proposed production tax credit extension, as outlined in the Biden administration's Build Back Better framework. While these near-term concerns are entirely valid, it's important not to ignore the simple reality that, on a levelized cost basis, onshore wind is one of the cheapest forms of energy available to the market, whether on a subsidized or unsubsidized basis, but turbine costs down more than 50% over the last decade. Commercial and industrial demand for renewable energy is expected to grow significantly over the coming years, with wind power representing the largest source electricity generating capacity additions in 2020. While longer term wind energy demand will be influenced by the sector's ability to continue to improve its economic position in the face of competition from solar and natural gas, our industry has proven its ability to be a cost competitive, reliable source of clean energy. With more than 90 gigawatts of new onshore wind capacity addition expected between now and 2030, representing approximately 100,000 new tower sections. We're bullish on the long-term outlook for our business and industry. Turning now to a review of third quarter results. We delivered $40 million in revenue, a decline of 26% versus the prior year period, due mainly to a decline in wind tower sections sold. As referenced earlier, this decline in tower sections sold was mainly the result of higher raw material costs and uncertainty around the timing and scope of a potential PTC extension. The net result of these conditions was that towers we expected to ship in 3Q have been pushed into next year. We continue to work with our turbine OEM customers, who represent approximately 65% of the U.S. market, to ensure that we are ready to support demand in advance of a market recovery. Currently, our OEM customers have placed orders to secure about 30% of our 2022 power tower production. For the full year 2022, we expect utilization at our tower plans to exceed 2021 levels. In June 2021, the U.S. Treasury Department published the Biden administration's tax proposals for the fiscal year 2022. These proposals included a provision that extends the PTC from 2022 through 2026 for both onshore and offshore wind projects. In late October, the House issued its draft of the budget reconciliation bill, also supporting this PTC extension. If passed into law, the company expects that the administration's planned multi-year extension of the PTC should provide a significant catalyst for tower demand. As a result of the favorable policy backdrop and continued decline in the levelized cost of wind energy, we see a stable demand for wind installations at about 10 gigawatts per year over the next decade. Our diverse end-market strategy performed as intended during the quarter, as near-record growth in our non-wind markets helped offset softness in tower orders. Our gearing segment generated substantial year-over-year growth in both revenue, orders, and backlog, supported by demand from energy and steel markets. Consistent with our comments last quarter, Broadwind's non-wind end markets are recovering, as our industrial and energy customers place orders to replenish their inventories. Holding activity in our non-wind markets continues to be strong, and we expect good order flow for the remainder of the year, especially for gearing and industrial fabrication products. The full impact of the pandemic remains uncertain at this time, as the world deals with new variants, but we continue to take actions to keep our people safe and our facilities open. We expect to maintain adequate liquidity to support our business through this period of uncertainty. Within our heavy fabrication segment, revenue declined $14.8 million. We continue to quote and produce for multiple turbine OEMs, and this customer diversification will serve us well as the market recovers. Within gearing, revenue increased 6% year-over-year, while orders more than tripled to nearly $12 million as the anticipated improvement in customer activity continues. Revenue for our industrial solution segment slightly improved on a year-over-year basis, driven by the delivery of an international order which was pushed from Q2 due to global logistics delays. In summary, I am pleased with how our non-wind business has improved this year as we work through the temporary pause in wind tower demand. Importantly, we expect wind development activity to increase materially over the next 24 to 36 months, particularly should we see a substantial extension of the PTC, which looks as if it has a solid chance of being passed into law. As before, we continue to evaluate bolt-on acquisitions that leverage our existing manufacturing expertise and exposure to clean tech markets. We are considering opportunities for accretive acquisitions of assets or businesses with high revenue and or cost synergies, complementary product lines, and a well-established diverse customer base that further supports our diversification strategy. 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 five for an overview of our third quarter performance. Third quarter consolidated sales were 40.4 million compared to 54.6 in the prior year quarter. On a year-over-year basis, sales declined primarily due to a decrease in wind tower section sold as the wind market continues to experience a pause as a result of escalated steel prices and uncertainty related to the production tax credit extension. Q3 adjusted EBITDA was 0.4 million, a decrease of 0.9 versus the prior year period. The decrease in adjusted EBITDA is reflective of the lower overall volume level and the resulting plant underutilization in the current year quarter. Third quarter operating expenses decreased over $100,000 year over year. primarily due to reduced incentive compensation. Interest expense decreased by over $200,000, reflective of lower debt levels and a reduction in our borrowing rate. Turning to slides six and seven for discussion of our heavy fabrication segment. Third quarter sales were $28.7 million, down when compared to $43.4 million in the prior year quarter, driven by the aforementioned drop in wind tower demand. Third quarter orders were 26.5 million, a 15% drop from the prior period. Overall, tower orders have decreased, but we did receive new tower orders from multiple turbine OEMs for 2022 production. The decrease in tower orders was partially offset by a strong order intake quarter for our industrial fabrication product line, which is up over 250%. For the fourth quarter of 2021, we expect to operate at approximately 50% of our optimal power production capacity given our current order book. During the third quarter, we sold 197 tower sections, a 37% decrease versus the prior year period, resulting in a $2 million decrease in segment-adjusted EBITDA to $1 million. As we continue to focus on diversification and the expansion of our industrial fabrication product line, we continue to gain traction resulting in improved commercial activity within the related markets. Industrial fabrication product line sales were up 14% versus the prior year, and orders were up over 250% to $8.6 million, almost a $35 million run rate. Furthermore, the nine months ended September of 2021 were a record in terms of order intake for the industrial fabrication product line. During Q3, we also recognized our first sales associated with our modular pressure-reducing systems. This increased production activity has helped us to improve our plant utilization, given the near-term weakness in the tower market, especially in our Manitowoc plant, where the tower production activity is comparatively weaker than enabling. During slide eight, I will cover our gearing segment. We continue to be encouraged by the economic recovery across several of our key end markets, including the energy and industrial verticals. Following a challenging 2020 where energy and industrial demand was noticeably softer than historical levels, commercial demand has accelerated meaningfully this year, with 11.5 million new orders in Q3 compared to 3.2 million in the comparable period last year. Order strength is driven primarily by conventional energy customers, together with gains across a number of other markets. Year-to-date orders have rebounded to over $29 million, versus $19 million in the prior year period. Year-to-date book-to-bill is approximately 1.5x, and our backlog has recovered to nearly $24 million, which represents an increase of $4 million sequentially and $10 million versus the prior year. Third-quarter segment sales increased to $7.6 million versus $7.1 in the prior year, primarily as a result of increases in demand in most markets served. we generated half a million dollars of segment EBITDA in Q3, an increase of $1 million versus the prior year, as we benefited from increased production levels. Turning to slide 9 for discussion of our industrial solution segment. Industrial solutions recorded $4.5 million of new orders in Q3, down from 4.9 when compared to the prior year period, primarily as a result of the timing of orders from its largest customers. Our pipeline of opportunities remains healthy, including quoting activities with new customers and new end markets. Orders within the segment began the year slowly, but have accelerated towards the end of Q3, as September was a near record high, and October was the highest order month since Broadwind's acquisition of Red Wolf in early 2017. Third quarter segment sales increased modestly to $4.2 million, but EBITDA decreased slightly as we had a less favorable mix of products sold when compared to the prior year period. Turning to slide 10, operating working capital increased $2.6 million sequentially to $19.5 million, or 12% of sales. Driving this increase was a decrease in customer deposits of almost $8 million as our customer mix shifted towards new customers that typically do not provide deposits. Total cash and availability under our credit facility remains healthy and consistent with historic levels, with over $21 million of liquidity at quarter end, This includes approximately $2.3 million of cash on a balance sheet. Our net debt and finance obligations increased approximately $2 million during the quarter to $8 million, which reflects the aforementioned increase in working capital. On a year-over-year basis, we reduced net debt by $10 million as a result of the PPP loan forgiveness, which took place in Q2 of this year. As noted in our press release issued this morning, we expect fourth-quarter EBITDA loss to be between $1 million and $1.5 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.