Broadwind, Inc.

Greetings and welcome to Broadwind's third quarter 2024 conference, 2024 results conference call. At this time, all participants are on 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Ciccone. Thank you. You may begin.

Good morning, and welcome to the Broadwin Third Quarter 2024 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 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 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 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.

Thanks, Tom, and welcome to those joining us today. Robin delivered a solid Q3, highlighted by near double-digit EBITDA margin in our seventh consecutive profitable quarter, despite reduced revenue. Offsetting a transitional pause in new wind tower demand Third quarter results benefited from a higher value sales mix, improved execution, and targeted cost reduction actions. We booked $23 million in orders in the third quarter, a 45% increase from the year-ago period, driven by increased demand across all reporting segments. Heavy fabrication saw increased demand for the adapters used to repower wind turbines and for our pressure reduction systems, partially offset by decreased orders in the industrial and mining sectors. Gearing orders increased 46% year-over-year due to increased demand from the power generation and infrastructure markets. Orders from our industrial solutions segment increased 52% year-over-year due to strength in the global gas turbine market. At a commercial level, we continue to expand our product mix within higher margin adjacent markets. Quoting activity is elevated at all segments. But most notably in our heavy fabrications and industrial solutions businesses, we're quoting as up more than triple year over year, reflecting improved demand and the impact of our commercial efforts across our non-win markets, such as material handling, mining, and power generation. Operationally, we continue to invest in innovative technology to improve our process capabilities, reduce costs, and improve our profitability. our tower facility in Abilene, and sold a new portable milling system to machine flanges. This new flange mill is used to machine the surface between the top flange of a tower and the cell of a wind turbine. The new mill holds tighter tolerances, improves surface finish, and reduces setup time for a total reduction time of approximately 25% for that key process. Gearing continues to invest in technology that supports improved efficiency and speed to market. Most recently, the organization has deployed portable laser scanning and product measurement equipment to develop the 3D models used by our commercial team to quote gearbox designs, retrofits, or repairs, reducing our quote turnaround time by 75%, literally from weeks to days. Beginning in the first quarter of this year, we undertook significant action to align our cost structure with the current demand environment. In combination, these actions will contribute more than $4 million and annualized cost savings, which is evident in our results. As demand conditions begin to improve, we believe these actions position Broadwind to realize improved operating leverage entering 2025. Q3 revenue declined versus year-ago levels, primarily due to lower tower demand. Our non-wind activity levels remain relatively stable as we see demand for our precision manufacturing capabilities across multiple markets. In Q3, We generated EBITDA of $3.4 million and net income of $0.1 million. Within our heavy fabrication segment, Q3 revenue was $21 million, down 46% from a year ago, primarily due to the decline in tower production and PRS shipments, partially offset by increased sales of mining equipment. Gearing revenue was $9.2 million, a 19.6 reduction year-over-year due to broad-based softness in the oil and gas market, offset by an uptick in sales into the mining and industrial categories. Industrial Solutions revenue was $5.7 million, down 22.8% year-over-year, primarily due to the absence of a large international project shipped last year, which did not repeat. In summary, the operating performance of all divisions continues to be strong, as we quickly respond to demand fluctuations in the business. With that, I'll turn the call 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. In Q3, we delivered our seventh consecutive quarter of profitability. While revenue continues to be adversely impacted by the ongoing pause within the onshore wind industry, as well as an extended slowdown within the oil and gas sector, we were still able to maintain an adjusted EBITDA margin approaching 10%, a testament to our higher value sales mix, solid execution, and targeted cost reductions. In Q3, we generated $3.4 million of EBITDA compared to $7.6 million in the prior year period, due mainly to a 54% year-over-year decline in wind tower sections sold. This reduced level of tower sales versus the prior year is consistent with our previous commentary regarding the slowdown of avalanche production late in 2023. Turning to slide six for discussion of our heavy fabrication segment. Third quarter orders of 11.1 million are up both sequentially and versus the prior year period as we recognize orders related to wind repowering projects during Q3. We are currently building repowering adapters for two different wind OEMs at our Manitowoc, Wisconsin facility. work that will continue into 2025. Third quarter revenues were $20.6 million, down almost $18 million versus the prior year quarter. During the third quarter, we recognized segment EBITDA of $3.4 million, a decrease of $3.5 million versus the prior year period, primarily driven by the decreased revenue levels, partially offset by targeted cost actions taken towards the end of 2023 into 2024. Turning to slide seven, gearing orders of 4.4 million are up 1.4 million versus the prior year. Although we experienced an increase versus the prior year, orders of this scale are below desired levels, primarily due to continued softness in oil and gas activity. As we have mentioned in the past, we have recently made a significant investment in machine technology and expanded our commercial efforts, and we expect to see a corresponding increase in orders in the near term. Segment revenue was $9.2 million, down $2.2 million versus the prior year quarter. Q3 segment EBITDA was $0.6 million, a decrease from $0.9 million recognized in the prior year quarter. These decreases are reflective of the lower order intake levels we've been experiencing over the past four to five quarters. Turning to slide eight, industrial solutions recorded orders totaling $7.4 million in the third quarter. This represents an increase both sequentially and versus the prior year and a near record booking level for the segment. The segment has been experiencing strong commercial interest due to demand strength for natural gas turbine content, most specifically for new gas turbines, and we expect order strength to continue into Q4. Q3 segment revenue was $5.7 million, a decrease versus the $7.4 million recorded in the prior year period. The prior year revenue total included a large international shipment, which did not repeat in the current year. Q3 segment EBITDA was 0.6 million, a decrease of 0.3 versus the prior year period, reflective of the decrease in segment revenue. Turning to slide nine. We ended the third quarter with total cash and availability on our credit facility of $19 million, a sequential improvement versus the second quarter. As discussed last quarter, After a significant decrease during the first half, our deposit balance returned to a more typical operating level at the end of Q2. During Q3, we experienced a moderate decrease in our operating working capital balance for the first time this year, and we had positive cash flow of $4.8 million. During the fourth quarter, we are anticipating inventory levels to increase as we expect to be holding larger amount of finished goods in accordance with our customer shipping needs. As such, we anticipate a meaningful Q4 increase in operating working capital and a temporary increase in borrowings. Finally, with respect to our financial guidance, today we are introducing financial guidance for the fourth quarter of 2024. Given our current expectations and beliefs, we anticipate fourth quarter revenue to be in the range of $31 to $33 million and adjusted EBITDA to be in the range of $1 to $1.5 million. That concludes my remarks. I will turn the call back over to Eric to continue our discussion. Thanks, Tom.

Now allow me to provide some thoughts as we enter Q4, beginning with our heavy fabrication segment. We believe domestic onshore wind activity is poised to accelerate in the 2025-2026 timeframe, given current indications of interest from customers. We are encouraged by the momentum in the wind repowering market as we support multiple customers as they update and repower legacy turbines, to increase their power generating capacity while extending their useful lives. A sustained higher interest rate environment has impacted project economics for some developers, leading them to or defer the timing of their investments. However, recent reductions in interest rates and declining steel prices will benefit wind project economics over time. We remain confident on the long-term economics of wind given the improving capacity factors of turbines and the competitive costs of wind power, particularly with the 10-year tax credit visibility afforded by the IRA. We're excited about the launch of our newest model in the family of natural gas pressure reducing systems, or PRSs. The Broadwind Clean Fuels L70 low-flow PRS unit is the third model in this product family. It's now in field testing, and we're seeing strong customer interest in this model, given its performance specifications, compact footprint, and attractive price point, making it the ideal solution for industrial applications such as primary or backup power supply systems and pipeline integrity projects. In our gearing segment, efforts to broaden our sales mix into less cyclical markets continue, positioning us to realize a more balanced, stable revenue profile. We continue to execute our strategy to move beyond traditional gearing to other precision machine products. We're pleased at the increasing level of customer activity we're seeing as a result of our investments in process capabilities and qualifications. As customers continue to reshore, we are well positioned to provide them with a quick, high-quality, and competitive alternative to their legacy suppliers. Furthermore, we continue to advance our growth and diversification strategy in gearing Having recently completed our AS9100 quality certification, which will allow us to begin serving the aerospace market with direct customer qualifications currently underway. In our industrial solutions segment, the momentum that we've experienced in the gas turbine industry in the first half of 2024 continued into the third quarter. As our key customers are seeing strong demand for gas turbine equipment and services, and are reporting strong backlogs. Accordingly, quoting activity remains high, tripling in volume from the prior year. As a reminder, our industrial solutions business provides supply chain solutions, custom fabrications, and control panel manufacturing for the growing combined cycle natural gas turbine market. Driven by demand growth attributable at least in part to data centers and other sources of increasing load for electricity worldwide. As a result, in this business, we're on pace for another record order year, surpassing the previous records set last year. In summary, I am pleased with the strong operational performance from our team this quarter as we continue to demonstrate strong execution on our strategic priorities. We've reduced our cost structure during a transitional period for domestic onshore wind demand while retaining our key talent and continuing to work on vital activities like process improvement, and product expansion. Our focus on team member safety has yielded a 51% reduction in our recordable incident rate so far in 2024, well below the industry average. And we have had zero lost time incidents this year. We're committed to keeping our people safe and productive. We continue to build a firm foundation for steady, profitable growth, serving the power generation, infrastructure, and other key markets with high-quality, precision components and proprietary products to capitalize on improved demand in the years ahead. With that said, I'll turn the call back over to the moderator for the Q&A session.

Thank you. At this time, we'll 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 store keys. One moment, please, while we poll for questions. Our first question comes from Eric Stein with Craig Hallam. Please proceed with your question.

Hi, Eric. Hi, Tom. Hi, Eric. Morning. Hey, good morning. So, you know, maybe starting with wind, I can appreciate some uncertainty there, but also some cautious optimism. Just when you think about your view of that business today versus, say, a quarter ago or a couple of months ago, curious if it's improved, if it's tempered a bit, and what does the election outcome have, or how does it factor into your view for 2025 and beyond?

Well, I'd say my opinion has has improved a little bit in terms of optimism. I think anytime there's an election uncertainty, people tend to pause. Now that the election is complete, I think there might be a little bit of relief. I don't think the election will impact wind or impact broadwind really in any way. Just keep in mind our wind business benefits both sides of the aisle. We're a manufacturer producing wind turbine towers and a bunch of other things. So I really don't think the election will have an impact certainly not in the near or medium term.

Got it. And then maybe just thinking about 25 and all the moving parts across your business, I mean, do you look at 25 as kind of that's the year where you see follow-through in the order trends you're seeing now, you know, order recovery throughout the year, and then it really sets you up for 26? Or, I mean, is this something where you think, that what you're seeing now and what you would see early in 25, you know, potentially bodes very well for 25. You know, just curious, you know, whether year over year look or however you want to describe it.

Yeah, thanks, Eric. We've got really good visibility of our wind turbine tower production, really through the first three quarters and then some in 2025. We've got some customer activity that I think is accelerating in terms of demand, RFQs and things like that, talking about late 2025 and into 2026 volume. So I continue to believe that 2025 is going to be similar to 2024 in terms of volume with a little bit of uptick. We mentioned adapters. That tends to be strong for us. That's the wind industry. And I do think we should start seeing some more activity towards the Q3, Q4 timeframe in 2025 in preparation for 2026 volume. I do expect it to ramp up a bit.

Okay, so that's wind commentary. I mean, just thinking about the rest of the business.

Sure. Yeah, the other businesses we have, well, first of all, just a reminder that we service power generation from the gearing standpoint. from the industrial solution standpoint, from the PRS standpoint, and that's really strong. That's why we're seeing such strong water activity in industrial solutions. And so I think that particular market, power generation, is at the beginning of a super cycle if you think about load generation or demand in the U.S. for electricity. With regard to our other markets, material handling, industrial machinery, mining, et cetera, but we're either at a neutral level or slightly negative trend in 2024. But all of those trends are looking to be positive as we exit 2024 and into 2025. As an example, material handling is expected to have an upward trend all the way through 2027. We sell into that for our material handling for our big cranes that we produce. Industrial machinery is also, the trend of that particular market is actually a steeper positive trend than material handling. Engine, turbine, power transmission, I mentioned that's also very strong. Mining is also expected to have a bit of an upswing, Eric, but not as steep as those other three that I mentioned. So I think we're well positioned. Wind is going to be what it's going to be, as I mentioned that. But the other markets we're in, I think, are we're beginning of an upward trend in all those markets.

And arguably, oil and gas, I guess the general thought would be that oil and gas are set to improve given the administration change.

Yeah, I didn't mention that, but that's the one that continues to be soft, but you're right. Our customers, we're talking about them wanting to place orders for fracking pumps and things like that. They've been waiting, frankly, for the outcome of the election either way, but certainly the way the election turned out, I think, bodes well for oil and gas. Okay, thanks. Thanks, Eric.

Our next question comes from Amit Dayal with H.D. Wainwright. Please proceed with your question.

Thank you.

Good morning, everyone.

With respect to power generation, Eric, you know, outside of wind, can you maybe give us some sense of what the products you are offering, products and services you are offering?

Yeah, keep in mind, yeah, thank you. So the industrial solution segment that we have, the one out of North Carolina, The vast majority of their output services combined cycle natural gas turbines around the world. We provide supply chain solutions, light manufacturing, panel manufacturing for natural gas turbine deliveries and upgrades and new installations all around the world. And that market is very, very strong. In fact, we service multiple customers. One of our customers has gone public and said that they're sold out for the next five years. and are looking to increase their capacity. And we are following that trend. So natural gas power generation is big for us, and we're doing well there. Obviously, wind is power generation, and the PRSs that we have also supports power generation.

Okay, thank you for that. I mean, natural gas could be a beneficiary under this new administration. So it looks like all the diversification efforts you have put in place, you know,

Right, and this trend started before that, before the election. But you're right, I think it will only strengthen. And if you mentioned data centers and AI, the load increase, not to mention electric vehicles, is just going to be fantastic for the United States and globally. And so we participate in most of those markets.

Understood. That's good to know. You know, you've taken a lot of steps to cut costs. It looks like you are there now. You know, probably not much more room to sort of cut costs from here. But from a revenue growth perspective, you know, outside of wind, obviously that is a separate segment for you. But for other segments, other products, what are the, you know, revenue growth strategies that you may be looking to implement? You know, is it just maybe branding or, you know, building a stronger sales team? Just trying to understand what you're already doing today and what you may be thinking of doing that can sort of now allow you to create some leverage, you know, for all those people.

Yeah, that's a great question. And it is something we have been working on in addition to the diversification strategy. And I look at it as three tiers. First, we have to improve our process capabilities to allow us to take on those new markets and those new products. And we have done that. Industrial solutions we've done in gearing, as I mentioned on previous calls, with all the five access equipment we've invested in. So first, you have to have the process capabilities available to you to address those markets. Then you have to have the quality certifications. We've been improving our quality certifications primarily in gearing, but also in the other divisions in terms of ITAR, CMMC, the AS9100, which is aerospace and defense. So we now have those qualifications in place. So you have the process capabilities, then you have the qualifications, which customers are looking for. And then, of course, you have to have the commercial outreach. And we've really improved. We've added to our commercial team, in spite of the fixed overhead and SG&A cost cuts that we've done, we have added commercially. We've added and top graded our commercial team. And what we're doing is we're adding people to our staffs that understand those new markets so they can leverage the process capabilities and the quality certifications and get those markets. That's why earlier on the call I mentioned that we've had our RFQs have tripled in both industrial solutions and in heavy fabrications, but nearly doubled in gearing. So We're starting to see the early fruits of those commercial efforts, and we are confident that those will become bookings as we go through Q4 and into Q1-25.

Yeah, and just to add to that, I think really what we're trying to focus specifically within our gearing segment, we're really trying to focus on the non-gearing, the precision manufacturing, precision machining business, and just market those capabilities.

Understood. If that's all I have, guys, I'll take my other questions offline. Thank you. Thank you.

We've reached the end of the question and answer session. I'd now like to turn the call back over to Eric Blashford for closing comments.

Yeah, I've had a question regarding our Q4 guidance. I just want to remind the audience that Part of that is because we had some of our customers pull volume into Q3 2024, which is why our Q3 2024 was so strong. So when you combined Q3 and Q4, it actually is really aligned with what the analysts thought we were going to be. So we're pleased to have delivered such a strong Q3. And when you add Q4 to it, it'll add up to a strong second half of the year. And again, thank you for your attention on this call. We're excited for what we're doing here at Broadwind and look forward to coming to you and talking about our Q4 results early in the year. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.