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spk04: 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.
spk05: 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.
spk04: 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.
spk05: Thanks, Tom. Turning to slide 11 for further discussion of our outlook for the domestic wind market. And there are some encouraging signs here. We have a renewable-friendly administration that has taken steps to drive investment including the PT extension late last year, and the consideration of a much longer term PTC presently being negotiated in Congress. In addition to these considerations, the bipartisan infrastructure framework, which was sent to President Biden for signature, includes grid improvements, which will support the expansion of renewable energy. Broadwin supports this legislation as it represents both an engine for new job creation and a foundation upon which to modernize our aging infrastructure with lower cost renewables. After a pause in installations early in 2022, we expect robust installations for each subsequent year through 2030, consistent with expectations for continued growth in wind energy, given its price competitiveness. Offshore remains an attractive growth area for wind capacity additions in the U.S., primarily off the coast of the eastern states, with nearly 32 gigawatts of new installations forecasted to be put into service during the next decade. This new to North America source of clean power is key to meeting individual state mandates designed to move away from fossil fuels in the medium to long term. Furthermore, as ESG mandates increase, commercial and industrial buyers will continue to be a major driver of wind power demand in our view. As we look outside of wind, we continue to make exciting progress across a number of diverse end markets while staying mindful of our long-term strategy to proudly support the world's transition to a cleaner future. Our customer diversification initiative remains central to our overall plan, one that allows us to optimize our production facilities and leverage our skilled workforce, as wind tower orders may vary from quarter to quarter. Wind renewables and other forms of clean power remain core to our business, even as we continue to expand our non-wind revenue streams. Today, our fastest-growing non-wind segments include power generation, mining, and the industrial segment, which includes our penetration into the material handling and marine markets. In our heavy fabrication segment, we are working to sell 2022 capacity, add capabilities to improve our asset utilization, and invest in new product development, such as we've done for the modular pressure reduction systems for the natural gas virtual pipelines. We continue to evaluate the offshore turbine market in the U.S. for possible points of entry as we continue to expand our mix of complementary industrial fabrication customers. In our gearing segment, we are working to shift our sales mix toward markets which tend to be less cyclical and offer a more balanced revenue stream. We've added some capabilities in both machining and heat treat to reduce costs and expand margins while improving throughput. And we continue to grow our custom gearbox business with special emphasis on our repair and upgrade categories to help our customers improve their system reliability and plant utilization. In our industrial solutions segment, we continue to expand our market share both domestically and internationally. We have added precision fabrication equipment to increase value add, improve our response times, and expand margins. Our opportunities to grow our wind turbine internal component business have also increased. as customers seek to reshore more content to minimize global supply chain risk. In summary, we're committed to being an active participant as the world transitions to a cleaner future. And given the continued strength of our balance sheet, we are well capitalized to pursue both organic and inorganic opportunities that further support our growth strategy. With that said, I'll turn the call back over to the moderator for the Q&A session.
spk01: Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. Our first question comes from the line of Justin Clare with Roth Capital Partners. Please proceed with your question.
spk02: Hi, guys. Thanks for taking the questions.
spk05: Hey, Justin.
spk02: So I guess first off, I believe you said that for 2022, for the full year, you expect tower utilization to be above 2021 levels. So I was just wondering, you know, can you share what gives you the confidence in that outlook, given the uncertainty in the policy environment and the higher raw material pricing that we're seeing right now?
spk05: Yeah, that statement is kind of a combination of two things, Justin. Yes, we do have some visibility for 2022. We are in conversations with customers about some 2022 capacity. We also have some projects in the repowering category for adapters and whatnot, which also we include in that plant utilization metric. But also keep in mind we've got industrial fabrications that sometimes move through those same plants. So with the combination of all three, we feel confident about that statement.
spk02: Okay, great. And then you did mention that you see, you know, potentially toward the end of 2022 into 2023 inflection point in demand for onshore wind. Just wondering, you know, what drives that inflection point? Do we need to see, you know, certainty on the policy front and then a reduction in raw material pricing? Or are there other factors that you see that are important?
spk05: Well, first there's the fact that wind is one of the lowest, if not the lowest, cost of power generation really available to anybody in the U.S. But, yeah, I do think the PTC is certainly going to be a driver there. We also believe that steel will begin to rationalize, at least that's what our expectation is, towards the end of next year. So that combination of two, the policy and a bit of a rationalization of steel, gives us the optimism.
spk02: Okay. And then just shifting to the gearing segment, it looks like the backlog here is at its highest level in more than two years. And then I think historically you've said, sorry if you hear the crying in the background here, but historically you said with revenue at $8 to $10 million, you're able to generate EBITDA margins at 15% or above. So given the backlog that you have, do you anticipate getting to EBITDA margins of that 15% or higher and delivering revenues at $9 million or maybe above?
spk05: Yeah, that's a good question. Thanks for the question, Justin. I do think when we're at those kind of run rates with that factory kind of $9 million-ish a quarter, their $36 million annualized run rate, Yeah, we do see the ability to, because we've got great factory utilization at that point, we can use our cells better and whatnot. So, yeah, I think we can certainly see north of kind of low double digits EBITDA generation. Depending on the mix, we could get to the mid-range of what you said, which is kind of AGMA, which is Gear Manufacturers Association peer group. But, yeah, so it is possible given... Given a certain mix, we could hit those numbers, but certainly above low double digits.
spk02: Okay, great. I'll pass it on. Thank you.
spk05: Thanks, Justin.
spk01: Our next question comes from the line of Eric Stein with Craig Hallam. Please proceed with your question.
spk03: Hi, Eric. Hi, Tom. Hi, Eric. Hey, so interested in your commentary on the inorganic requisition Outlook and presumably it's just because of how you feel about the balance sheet. You know, maybe where do you expect to focus? Is it more on the diversification side or would it be more on the win side and maybe looking for more content or how should we think about that?
spk05: I think the acquisition targets we're investigating are definitely in the cleantech space. If we could see something that would perhaps benefit, you know, towers or wind themselves, such as maybe a storage solution, that would be attractive to us. But we're especially interested in anything within the clean tech space, which could be wind, could be solar, where we see the potential of even re-rating our valuation multiple. What's most important is we're looking for acquisitions that would be complementary to our business capabilities and our target markets would be in the clean tech space.
spk03: Got it. And nowadays, what kind of multiples are you seeing? Are the multiples reflecting that there is some near-term uncertainty, at least in wind, or still pretty elevated in terms of what potentially is coming on the policy front?
spk05: As a renewable space, what I've seen is kind of the bargains, if you will, which aren't necessarily attractive, would be in the kind of the 8-9. We've seen them much, much higher than that, kind of in the 12s, Eric, when we're looking at in this particular space. But you're right, it has softened a bit, and I think it's because of, again, this policy kind of uncertainty that we're all living through right now.
spk03: Got it. Maybe last one for me, just on offshore, you mentioned it a little bit. I know it's certainly an initiative. You've talked about it in the past, but maybe You know, now that the administration's come out with some of their measures, obviously their goals, more activity, and certainly some of your customers are part of that activity, you know, maybe just an update on what you see and, you know, potential steps you're taking.
spk05: Well, I mean, it's certainly interesting. One of the dynamics is it's still there in spite of the policies It tends to be moving to the right a little bit, in other words, pushing out a little bit to 23, 24. But we're on the situation. We're in very regular conversations with our OEM customers, the port locations themselves that we've been considering, even with some developers. So, yeah, our message is that we support the development of offshore wind. We believe it's really important for our country. And we'll participate, but it's going to have to be in a deal that makes good sense for all parties involved, our customers, ourselves, and our shareholders. So that message is consistent, Eric, but we still remain very interested, but it's got to make sense.
spk03: Got it. We'll stay tuned on that. Thanks.
spk05: Yeah, thank you. Appreciate the questions.
spk01: And again, just as a reminder, if you have any questions, you may press star 1 on your telephone keypad to join the question and answer queue. Our next question is from the line of Amit Dale with HC Rainwright. Please proceed with your question.
spk06: Thank you. Good morning, everyone. So, you know, hey, here. So if this PTC comes through for you guys in the next, you know, Going into 2023, you know, with recovery in your non-wind segments taking place, you know, with economies opening up again, et cetera, I mean, will we be in a position where we need to add capacity to meet the wind and non-wind demand?
spk05: Well, I'll tell you what, that would be a great problem to have. We always love those kind of problems in manufacturing. I would say it's possible. In many cases, in our plants, our wind business runs down. It's the same workforce, but it's a different line. So we can definitely produce these things next to one another. We would have to perhaps add to the workforce. But even in one of our locations, especially the northern location, we have the ability to expand into other buildings on that peninsula, whereas we could increase our workspace if we needed to.
spk06: Okay.
spk05: Understood.
spk06: Okay. Can you give us any sort of sense of how much pent-up demand there is because of this PTC? I mean, once it comes through or if it comes through, I mean, will you be able to fill your capacity within a quarter or even faster?
spk05: Yeah, well, I think that comes down to the timing of the PTC when it's passed, and I certainly hope to see it passed in, let's say, late this year or Q1. And then we're subject to a little bit of project timing, which I think could happen quickly. And then what we're subject to then is the normal lead times in our business, which I've spoken with you about, which could be at the shortest, maybe a 20-week lead time, sometimes a bit longer than that. So I would say that's why I'm bullish on the second half of 2022, especially towards the end of that, heading into 2023. So think along the lines of maybe, you know, a month or so for the projects to line back up again, get through the developers, the OEMs, and then to us, and then our normal supply chain length.
spk06: Okay, understood. And with respect to some of these inflationary trends, are you being able to pass on cost increases you are seeing to customers, or are you having to digest some of that yourself?
spk05: Yeah, well, the answer is yes and no. I think you're aware that with regard to the towers business that we have, each one of those is individually quoted. It's directed by situation. So we don't have steel risk there. But there are other components, you know, welding gases, some indirect spend that has to do with consumables and whatnot that we are seeing inflationary expenses that we have to offset by our own efficiencies within that particular business. The other businesses that we have, those are all quoted directly project by project. So we're able to pass much of those on. The challenge comes if there's a timing because some of these cost increases are happening more quickly even within a quoting period, which sometimes can be less than 30 days. So we are faced with taking some of those on ourselves and not being able to pass those on to our customers due only to timing. But I will say in this inflationary situation, the entire supply chain, including our customers, understands the situation, and they are accepting price increases from us.
spk06: Okay. That's good to hear. All right, Eric. That's all I have. I'll take another question. Thank you.
spk01: Thank you. And we have reached the end of the question and answer session. I'll now turn the call back over to Eric Blashford for closing remarks.
spk05: Well, thanks, everyone. I appreciate your interest, and we look forward to coming back to you after our Q4 to report those results to you then. Have a great day.
spk01: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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