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spk06: Greetings. Welcome to Broadwind's second quarter 2022 results conference call. 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. Please note this conference is being recorded. I will now turn the conference over to Chief Accounting Officer. Thank you. You may begin.
spk05: Good morning and welcome to the Broadwin second 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 principal accounting officer. We issued a press release before the market opened today detailing our second 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 discussion of some of the factors that could cause actual results to differ, please refer to the risk factor 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 and 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.
spk04: Thanks, Tom, and welcome to those joining us today. During the second quarter, we generated strong year-over-year revenue growth within our gearing and industrial solution segments. while non-wind orders increased more than 60% in the second quarter when compared to the year-ago period. Once again, our non-wind business proved to be an important offset to a continued pause in wind tower demand as the market attempts to manage true policy uncertainty, such as that around the proposed extension to the Federal Production Tax Credit, or PTC, together with the still elevated raw material costs, such as steel plate. At this time, we believe the wind market will begin to recover in 2023 and are encouraged by the recent congressional efforts to pass the proposed Inflation Reduction Act, or IRA, that includes several major renewable energy provisions, most notably an extension of the PTC on projects beginning construction before January 1st, 2025. Operationally, labor remains a challenge, but we're seeing improved recruitment levels in several of our markets. We continue to closely manage the impacts of cost inflation and have adjusted our quoting models to reflect rising costs. We're effectively managing our cash and expect to have liquidity remain at current levels by year end calendar 2022. During the second quarter, we delivered $50 million of revenue, an 8% increase year over year led by growth in our gearing and industrial solution segments, which posted gains of 37% and 43% respectively. And excluding the PPP loan forgiveness and ERC impact in Q2 2021, adjusted EBITDA increased $300,000 year over year. We continue to work with our turbine OEM customers who have placed orders to secure about 50% of our optimal 2022 tower capacity and are now reserving capacity into 2023. Tower quoting activity is increasing as our OEM customers work to secure tower production capacity for the first half of 2023, as is typical for this time of the year. The recent news regarding the climate-related aspects of the IRA have accelerated interest in available capacity. On a consolidated basis, our Q2 orders were $26 million a 1% decrease year over year, reflecting a softness in tower demand partially offset by stronger orders within the gearing and industrial solution segments, as well as for the industrial fabrication product line within heavy fabrications. Our heavy fabrication segment saw orders of $13 million, a 12% decrease year over year, with stronger industrial fabrications orders offsetting the timing of tower orders. However, in early July, we received nearly $8 million in new tower orders, an encouraging data point that supports our view for an improved wind outlook into next year. Our gearing segment booked $9 million of orders, a 14% increase year over year, as we continue to see strength in our energy and industrial markets. Our total backlog at the end of Q2 was $93 million, a 25% gain versus the prior year period. Quoting activity in our non-win markets remains strong, and we expect the good order flow to continue through 2022, most notably from the gearing in industrial fabrication products. We are seeing the ability to pass on inflationary cost increases in our new quoting activity, and in certain cases, through temporary surcharges. Within our heavy fabrication segment, revenue declined 1% year-over-year due to a pause in tower demand. We're allocating spare tower section capacity toward other projects in energy, commercial, and other industrial markets. We continue to quote for multiple wind turbine OEMs as our customer diversification in the wind energy segment will serve as well as the wind market recovers in conjunction with federal policy clarity. Within gearing, revenue is $10 million. a 37% increase year-over-year as customer activity continues to accelerate within the energy sector given elevated commodity pricing. Revenue for our industrial solutions segment increased 43% to $5 million, driven by increased demand for natural gas turbine content, including stronger demand for components used in the aftermarket maintenance and upgrading of these units. In summary, I'm pleased that our diversification strategy continues to provide new opportunities, particularly as we work through the temporary pause in wind tower demand until the headwinds of commodity pricing and policy uncertainty resolve. Our team has responded quickly to the well-documented global supply chain challenges while continuing to optimize both our assets and human capital during a transitional period. activity to ramp up gradually over the medium term, particularly if we see a substantial extension of the PTC as reflected in the most recent version of the IRA. With that, I'll turn the call back over to Tom for a discussion of our second quarter financial performance.
spk05: Thank you, Eric. Turning to slide five for an overview of our second quarter performance. Second quarter consolidated sales were $50 million, compared to $46.5 million in the prior year quarter. Versus the prior year, Q2 sales increased in our gearing and industrial solution segments, but remained flat within heavy fabrications. Sales in both the gearing and industrial solution segments benefited from strong recent order intake, and gearing saw revenue increases in most end markets served, partially offset by a reduction in wind, which tends to fluctuate based on customer order patterns. Within heavy fabrication segment, tower sections sold were down almost 50%, but we benefited from an increase in repowering activity as well as 150% increase in industrial fabrication revenue, also a byproduct of strong recent order intake for that product line. In Q2, we recognized 400,000 of adjusted EBITDA compared to adjusted EBITDA of 12.8 million in the prior year second quarter. It should be noted that the prior year second quarter results include a $9.2 million benefit related to the PPP loan forgiveness, together with a $3.6 million benefit attributable to the ERC as outlined in the provisions of the CARES Act. Excluding the impact of these unique benefits, adjusted EBITDA increased by $300,000 when compared to the second quarter of 2021. Turning to slide six for discussion of our heavy fabrication segment. Second quarter orders were 12.9 million, a 12% decrease from the prior year period. This decrease in segment orders is attributable to the industry-wide pause in overall wind activity. While we continue to experience weakness related to our wind tower line, there was strong interest in our industrial fabrication products. Industrial fabrication orders increased nearly 8 million or 250% versus the prior year quarter. The most significant driver of this increase was related to our natural gas pressure reducing systems, or PRS units, whereby we recorded several multi-unit orders totaling approximately $6 million. Second quarter sales were 35.6 million, down only slightly when compared to the 35.8 million in the prior year quarter. Weakness in tower sales was largely offset by a greater than 150% increase in industrial fabrication revenue, which benefited from strong order intake late in 2021 and into 2022. During Q2, we completed an ongoing wind repower project in Manitowoc, and we are transitioning that workforce and plant capacity to focus on industrial fabrication work. Overall, power demand out of our Manitowoc facility continues to be soft, but we've been able to partially offset that temporary softness with our industrial fabrication products as per our plan. Interest in our Abilene production capacity continues to be stronger in comparison due to ongoing or planned projects in that region. Given the interest in our Abilene plant and our ongoing industrial fabrication work in both locations, we remain diversified and prepared to endure the near-term headwinds we've been facing. During the second quarter, we sold 160 tower sections, down versus 302 in the prior year period and below historical levels. Despite the tower weakness in Manitowoc, we expect to operate at near optimal capacity levels for the balance of the year in Abilene. Adjusted EBITDA for this segment was 1.2 million in Q2. Excluding the impact of the PPP loan forgiveness and the ERC, adjusted EBITDA decreased by 0.5 million when compared to the second quarter of 2021, reflective of the cost to transition our workforce and plant capacity to industrial fabrication work. Turning to slide seven, I will cover our gearing segment. Gearing orders total $8.9 million in Q2, down sequentially, but up 14% from what was booked in the prior year quarter. Second quarter segment sales increased to 10.1 million versus 7.4 million in the prior year quarter as a result of the strong order intake we've been experiencing since mid 2021. In addition to persistent inflationary pressures, the segment continued to incur labor and training inefficiencies associated with efforts to increase its workforce in Q2 within a tight labor market as it ramps up production to meet demand. We generated a modest 0.1 million of segment EBITDA in Q2, a decrease of 2.8 million versus the prior year quarter. However, excluding the impacts of the PPP loan frigidness and the ERC recorded in the prior year, adjusted EBITDA increased by 0.5 million when compared to the second quarter of 2021. Turning to slide eight for a discussion of our industrial solution segment. Industrial Solutions recorded $4.1 million of new orders in Q2, up $300,000 from the prior year quarter. Sequentially, orders are down, but we've been encouraged by the progress in our core gas turbine business, including a significant increase in components for the aftermarket service and upgrade of gas turbines, improving our margin profile. Despite continued supply chain delays on inbound materials, second quarter segment sales, increased both sequentially and versus the prior year quarter. Sales were $5 million in the second quarter, up $1.5 million versus the prior year, and up $0.9 million sequentially. This increase is reflective of the strong recent order intake levels. EBITDA was $200,000 in the second quarter, which represents an increase of $200,000 versus the prior year quarter after adjusting for the PPP loan forgiveness and ERC which both benefited the prior year. Turning to slide 9, total cash and availability under our credit facility remains at an adequate level with more than $10 million of liquidity at quarter end. As we reported yesterday, we've entered into a new credit agreement with Wells Fargo. Not only does the new facility introduce a new $7.6 million term loan, but it increases the revolving line of credit from $30 million to $35 million. Initially, we estimate that the new facility increased the company's available liquidity by more than $11 million. Net operating working capital increased to $3 million sequentially to $25.7 million in the second quarter, primarily reflective of a $4.1 million decrease in customer deposits commensurate with our changing customer mix. We believe that the deposit balance will have limited impact to our operating working capital moving forward, and we expect operating working capital to remain relatively flat in Q3. Looking towards the end of the year, we do expect some working capital build as we will be building inventory levels ahead of Q1 2023 deliveries, similar to Q4 of 2021. During Q2, net debt increased $3.7 million sequentially as we funded the aforementioned working capital build. While we have taken measures to improve liquidity, we will continue to manage it prudently given the temporary pause in tower demand, the ongoing global supply chain challenges, and the potential need for working capital to support our growth strategy. Finally, with respect to our financial guidance, we expect the third quarter adjusted EBITDA to be approximately $1.2 to $1.7 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.
spk04: Thanks, Tom. In the near to medium term, we view the IRA as a positive potential catalyst for the wind sector as it clarifies the long-term tax policy guidance long awaited by developers. If passed into law, we believe this, along with rising commercial and industrial demand, will help drive increased wind installations over a multi-year period. As we continue to augment our wind business with complementary products, our progress continues across a number of diverse end markets. Customer and market diversification remains central to our overall plan, providing opportunities to optimize our production facilities, as wind projects vary from quarter to quarter. Renewables and other forms of clean power remain core to Broadwind, even as we expand our revenue streams outside of wind. Today, our fastest growing non-wind markets include power generation, mining, and the industrial vertical, which includes our increasing penetration into the infrastructure and material handling markets, as well as new inroads into the building and marine industries. In our heavy fabrication segment, we're adding some automation to improve our plant throughput, optimize labor, and reduce cost as we continue to work with customers to build capacity into 2023 for towers and other industrial fabrications. The proprietary PRS introduced last year to serve the virtual natural gas pipeline market is progressing nicely with development activity on track and orders slightly ahead of plan. In our gearing segment, we continue efforts to broaden our sales mix into less cyclical markets, offering a more balanced revenue stream. We continue to work with our customers to share inflationary cost increases as quickly as possible to preserve margins. The new machining centers are now fully operational, and we look forward to leveraging their capabilities to expand capacity, reduce costs, and open new markets. We are working to expand our labor force to meet the increasing demand and have launched a limited third shift to address certain production bottlenecks. Additionally, we've upgraded key management in our heat treat business to leverage available capacity to capture external growth opportunities. In our industrial solutions segment, we're expanding our market share both domestically and internationally, including the growing aero derivative segment of the gas turbine market. We're seeing increased quoting activity in adjacent markets, such as distributed power, wind, and solar. In summary, Broadwind remains an active participant in the ongoing clean energy transition. We see long-term growth for the domestic wind market given that wind energy continues to be one of the most cost-competitive energy technologies available. Our broadening customer set and increasing precision manufacturing capabilities create new business opportunities to help offset the normal order fluctuations in the markets we serve. We are carefully managing costs, capex, and liquidity during this pause in wind activity while executing against new market opportunities. And lastly, we remain adequately capitalized to support our growth strategy. With that said, I'll turn the call over to the moderator for the Q&A session.
spk06: Thank you. If you would 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 two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question is from Justin Clare with Roth Capital. Please proceed.
spk02: Hey, good morning. Thanks for taking our questions.
spk04: Morning, Justin.
spk02: So first off here, just wanted to talk a bit more about the Q3 guide. I was wondering if you could provide a bit more on what's driving the sequential improvement in adjusted EBITDA and just how you're expecting your revenues and EBITDA margins to trend in Q3. Are you anticipating some of the pricing changes increases that you're implementing rolling through in Q3 and potentially enabling higher margins here?
spk05: Yeah, thanks, Justin. In terms of revenue, I think we'll assume or we're projecting revenue to remain relatively flat in Q3. In terms of guidance, I think what's benefiting our improved outlook is just some price realization that's coming through the P&L based on pricing actions that we've taken.
spk02: Okay, that's helpful. And then I just wanted to see what you're hearing from customers on the potential for a pickup in wind tower demand if the Inflation Reduction Act were to pass. And how quickly do you think you might see a pickup in tower demand, and when could that flow through into revenues? Is that something that you could see in the back half of 2023, or could you see something earlier? And then also just, you know, if the legislation passes, do you think customers are going to try to act quickly to secure tower capacity, especially given that there are domestic manufacturing credits, which could, you know, enable you to lower your costs?
spk04: Yeah, thanks, Justin. We certainly see the IRA as giving some policy clarity that the market's been waiting for for literally a couple years now, it seems. We expect the benefit to really take a couple quarters, maybe three or four quarters to be fully realized. I do expect quoting activity to increase. Frankly, the phones are ringing a lot more frequently now than they were just a couple weeks ago. They're just interested in our capacity, availability, into next year and even into 2024. So I do expect customers, I do expect this bit of a log jam or this pause to break free over the next couple quarters. And as you're aware, the lead times for Towers is about 26 or so weeks. And so if we see orders break three in Q4, Q1, and Q2 of 2023, we could see revenue benefit towards the end of 23 and certainly into 24.
spk02: Okay, good to hear. And then just one more. I was wondering if you'd share, you know, how much of the current U.S. wind market is being served domestically, you know, and I'm thinking about tower producers here, versus how much is being served by imports? You know, given that there's the domestic manufacturing credit in the IRA, I'm imagining that domestic manufacturers such as yourself could see a significant benefit and be much more competitive. So, just wanted to see if we could better understand the opportunity there.
spk04: Yeah, I can speak in generalities there. Because the timing of the import data is two or three quarters behind, but in general, If we say there's about three or 3,500 towers produced in the United States every year, about 1,000 additional of those will come imported. So we could see essentially if that is truly a barrier and additional 1,000 towers needed in a normalized annualized market, which would be a benefit to all U.S. manufacturers.
spk02: Yep, certainly. Okay, great. Thank you. I'll pass it on.
spk04: Thanks, Justin. Thank you.
spk06: Our next question is from Sameer Joshi with HC Wainwright. Please proceed.
spk01: Hey, thanks, Tom, for taking that question. Hi, Sameer. Hi, how are you? Just digging a bit deeper on the prior question on EBITDA expectations. If the revenues are flat and this pricing action is helping, does that mean volume sales are down, expected to be down next year?
spk00: I mean, next, this quarter?
spk05: No, I think, you know, it'll be in the same range as where we're where we're at. This quarter, we're trying not to give revenue projections just because of some of the uncertainty related to supply chain. And, you know, we might have some things that slip in and out of the quarter. But I think a lot of our, you know, what I maybe should have mentioned to Justin is probably some of the increase in EBITDA that we might be expecting is really related to mix. We also have maybe a stronger mix in Q3 than we did in the first half of Q1, or first half of the year, I should say.
spk01: Yeah, the mix was going to be my next question. Thanks for that. One year from now, if you're also sharing or utilizing the capacity for towers, what do the blended contribution margin looks like from the different segments?
spk05: Well, we don't talk about contribution margin publicly, but what I will say is that we do have the ability to generate double-digit EBITDA percentages within our heavy fabrication segment when we're operating at full capacity. So there is the opportunity to approach that should the tower market get to the point where it was you know, in its strongest points. So there is that opportunity, and we're working towards that.
spk01: Right. And just in terms of capacity, if there is a resurgence following the IRA passage, how would you manage utilization between the different orders and demand that you have from different segments?
spk04: That's a really good question. We have been able to maintain our tower capacity in both plants. Even during this pause, we've been able to shift labor for the most part from the tower manufacturing part of the business to the industrial fabrications. We do see with a sustained order book and a stronger market, we will be able to recover our labor because we did have to let some labor go, especially in our Manitowoc facility because of the drop in tower demand. But we do believe we can produce both towers and industrial fabrications in those plants because we have maintained the capabilities to do both.
spk01: Got it. And then just one last one. The drop in customer deposits, what does it signify and how should we look at it as it impacts working capital going forward?
spk04: Well, I'll address the issue of what we can see from it. That's really a product of mix because certain customers require capacity reservations, and we like to have those in form of deposits. Other customers we negotiate different terms with. So I would read into that as a mix change. That could also recover if our mix would go back to more of a former mix. But regarding working capital, I'll turn that over to Tom.
spk05: Yeah, I think the only thing I'll add is I think we've seen a significant increase in working capital related to drop in deposits. We don't foresee that being a significant factor going forward. That could ebb and flow going forward based on customer mix like Eric alluded to.
spk01: Understood. That's all from me. Thanks for taking my question. Thank you, Samir.
spk06: Our final question is from Eric Stein with Craig Hallam Capital Group. Please proceed.
spk03: Hi, Eric. Hi, Tom. Hi, Eric. Hey, so maybe just on the IRA and potential passage here, I know we focused a lot on onshore, but in terms of offshore and some of the aspects there, I mean, do you think maybe too early to see OEM activity or or actions, you know, be impacted by that. But does that change your calculus at all, or how are you thinking about offshore?
spk04: Offshore is out there several years, Eric, and I think if we talk to the OEMs, they would say the same thing. This is certainly encouraging and seen as a stimulus, but there are a lot of other variables with offshore that we're not seeing, we don't have simply in onshore. So I think I think the impact of the IRA on onshore would be much sooner than the impact on offshore. So it doesn't really change our thesis regarding offshore. It's of interest to us. We certainly are studying it, but we would need to have a strong partner and OEM partner and developer partner in order for us to take the CapEx required to produce a manufacturing plant somewhere on the East Coast.
spk03: Yep, understood. Maybe to stick in with the legislation, I know you've talked about some new markets in heavy fab. And so, you know, hydrogen and carbon capture obviously have a big component of this legislation. So I guess kind of thoughts along those same lines.
spk04: Yeah, I think that's exciting. You know, we like to support all forms of renewables. We are primarily wind, as you know. But we see the CNG market, which also leads right into the RNG market, which is renewable natural gas. It captures the methane through digesters in farms and landfills and things like that. So the technology we've developed with the CNG, this PRS, this pressure-reducing system for CNG virtual pipeline, can be, and in fact we are looking into using that for RNG. And a little bit further out, Eric, in terms of hydrogen blends and hydrogen. So we definitely see this IRA as a catalyst to that, and it just reinforces that we're on the right track when we take a look at the clean fuel segment of the market going forward.
spk03: Yep. Okay. And then last one for me, just on the diversification, obviously great trends here in gearing, industrial solutions, and industrial fabs. I mean, do you, you know, I know that that was something where you needed higher energy prices. We certainly had that. But it does seem like, I mean, you've got more drivers than that alone. I mean, do you feel that the traction you're seeing right now is sustainable? You know, just thoughts, because obviously it's been quite good here over the last couple of quarters.
spk04: Yeah, we do. We track sales funnels. We track opportunities. We track markets. the order trends we're seeing in those diverse markets sustaining over the next several quarters. So we're confident in that. What's nice about those markets is they're diverse. In some cases, they're counter-cyclical to wind, which is good, and that's certainly what we want. And as you penetrate those customers, you tend to stick with those customers because it's not easy to get specced in, and we are becoming more and more specced in to those customers' products. So I do think there's stickiness there, and I do think it could be sustained certainly over the next several quarters, as we wait for the wind market to recover.
spk03: Right. Okay, thanks.
spk04: Yeah, thanks, Eric. Appreciate the comments.
spk06: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
spk04: Thanks, everyone. We appreciate your interest in Broadwind and look forward to coming to you again shortly and talking about our Q3 results. Thanks everyone. Thank you.
spk06: Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
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