Broadwind, Inc. (BWEN) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Broadwind First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference to your host, Jason Bonfigt. Thank you, you may begin.
Jason Bonfigt: Good morning, and welcome to the Broadwind First Quarter 2021 Results Conference Call. Leading the call today is our CEO, Eric Blashford; and I'm Jason Bonfigt, the Company’s CFO. We issued a press release before the market opened today, detailing our first 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 Factors section of our latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call today in our press release issued this morning.
Eric Blashford: Thank you, Jason, and welcome to those joining us today. After reporting strong full year results for 2020, which included significant growth in total revenue, margin capture, free cash flow and adjusted EBITDA. Our first quarter results were impacted by a number of near-term headwinds, including pandemic-related supply chain challenges, a week-long weather-related outage at our Texas facility in February and a shift in the timing of a tower customer order from the first to the second quarter. Despite these challenges, our business began to stabilize in April as supply chain challenges have begun to subside, resulting in improved utilization rates at our production facilities. Additionally, the presence of unfairly priced imports continues to negatively impact our business. Nevertheless, we are forecasting sequential growth in both revenue and adjusted EBITDA in the second quarter of 2021 when compared to the first quarter. Demand fundamentals in our core wind energy markets continue to strengthen. During the past decade, cost competitiveness of wind improved materially versus other forms of energy, with the unsubsidized levelized cost of wind energy having declined 70% since 2009. In addition to this major cost reduction, policymakers have set forth incentives to drive increased third-party investments in wind technologies, setting the stage for greater investments in renewable energy. In December 2020, Congress approved an additional year of the PTC at the 60% subsidy level, together with a new 30% ITC for offshore wind, creating the potential for increased tower demand over the medium term. Longer term, we view the recent decision by the Biden administration to reenter the Paris Climate Accord, the increasing potential for a new infrastructure spending bill, together with the reintroduction of the GREEN Act, as favorable catalysts for the sector. Given the success of the anti-dumping and countervailing duty investigations in December of 2020 and the continuing efforts to ensure an even-playing field in the U.S. We believe domestic wind tower manufacturers are uniquely positioned to benefit from these favorable market dynamics. As we have done throughout the pandemic, we continue to produce and ship products that meet and often exceed our customers' exacting application requirements. Order rates in our non-wind markets improved dramatically in Q1 as our customers return to a more normalized cadence of activity following a prolonged period of disruption.
Jason Bonfigt: Thank you, Eric. Turning to Slide 6 and 7 for a high-level overview of our first quarter performance. First quarter consolidated sales were $32.7 million compared to $48.6 million in the prior year quarter. In Q1, we worked through a number of challenges, primarily in our Heavy Fabrication segment, which ultimately led to a 33% year-over-year reduction in revenue. The largest impact to the decline in revenue was related to demand for our towers, combined with the wind repowering project in the prior year period. Additionally, one of our customers delayed a project resulting in a $4.7 million revenue deferral to Q2.
Eric Blashford: Thanks, Jason. Turning to Slide 12 for further discussion of our outlook for the domestic wind market. As predicted, 2020 was a robust year for onshore capacity additions with more than 17 gigawatts installed. Projections for 2021 remains strong with approximately 15 gigawatts of installations. While it is challenging for analysts to predict future demand in a rapidly changing environment, both in commercial and political terms, there are certainly some tailwinds for the long-term outlook of wind energy. We have a renewable-friendly administration that has already taken steps to drive renewable investment, including the recent PTC extension and evaluation of the GREEN Act, which includes a longer-term PTC incentive through 2026. An infrastructure bill would likely include a build-out of power transmission necessary to connect new sources of supply to areas of demand. Broadwind supports such legislation and believes it has a high probability of getting passed through Congress and signed into law. This legislation represents both an engine for new job creation and a foundation upon which to modernize our aging energy infrastructure with lower cost renewables. And as turbine technology continues to evolve, new, more efficient turbines continue to drive down the cost of wind energy, while the repowering of existing turbines provides an additional lift to demand. Further, as ESG mandates increase, commercial and industrial buyers will continue to be a major driver of wind power demand in our view.
Operator: Our first question is from Eric Stein of Craig-Hallum.
Eric Stine: So first, just wanted to start with wind. I know you have got 60% booked. Can you just remind us what is the typical percent that you would have booked at this point in the year? And then what is a realistic capture of what you get? And is that something that there is enough time that it could impact at the back end of 2021 or anything that you fill in terms of capacity is really going to be more towards early 2022?
Eric Blashford: Sure. Well, at 60%, we certainly have been higher than that in previous years. We'd like to be higher at this point in time, but we are working with our three core customers to fill that capacity in Q4. And there is still time to fill that capacity. I think we have talked about it on previous calls. The lead time for steel and to start production typically in the four to five-month range.
Eric Stine: And then, I guess on that topic, steel, given what tripling the prices here and not that long period, can you just remind us the setup there, you obviously use a lot of steel, but I believe it may vary by OEM, but you have got some pretty good mechanisms in there to pass that on.
Jason Bonfigt: Sure. Yes. As a reminder, most of our - virtually all of our contracts are direct to buy. We don't take steel risk. And so we purchase steel by project. So we don't have that issue as far as a risk to Broadwind. But we are cognizant of the fact that rising steel prices could impact our customers' bids, but that is not a risk for Broadwind.
Eric Stine: Okay. And then last one for me, just interested in the release you put out yesterday, the pressure reducing systems. Can you just help us understand that a little more the - who is your customer there? Is it more the trailer companies? Is it the haulers themselves, the NG advantages of the world or is it the end user? And then what type of - I know it is early, but what type of market opportunity do you see there?
Jason Bonfigt: Sure. The customers are varied - we did a lot of homework on this product as we were contemplating it. The customers would be virtual pipeline providers, utilities. There is potential that perhaps a trailer company that would be supporting a virtual pipeline provider would be one of our direct customers. We think the market for that is could approach $100 million. So it is not a huge market, but it would be pretty substantial for us to take a nice share of that market. It fits our strategy because we are supporting the world's transition to clean energy future, and we know that natural gas, in addition to our wind and renewables focus, is a transitional fuel towards that future. So we are happy to be part of that.
Eric Stine: And did you get into this area. I mean, clearly, it is a need and you are right virtual pipelines, and that is an area of quite a bit of growth. I mean, is this something where you saw from a competitive standpoint, there was an area that you had a real opportunity a customer nudge in this direction or how did this come about other than it fits all in the strategy?
Jason Bonfigt: Yes. A couple of years ago, we were asked by a couple of customers to do some compression technology is, we build to integrate processing skids. And as we were doing the compression for these customers, we realized that their pressure reduction, which is the other end, was a real weakness, and it was something that the customers were having to do themselves. It was kind of an awkward design. And so we thought, look, we took a look at that and figured out how to do a better job at that in terms of packaging, weight, efficiency, and that is where we came idea.
Operator: Your next question is from (Ph) of H.C. Wainwright.
Unidentified Analyst: So as far as your opportunity for offshore wind goes, is there any visibility in the near term, in the next two, three quarters and in terms of longer term, mid- to longer-term outlook there, is there any competitive advantage or in terms of the partners that you are working with in winning these offshore wind projects?
Jason Bonfigt: The competitive advantages with specific customers, was that your question?
Unidentified Analyst: Yes. It is mid to longer-term because I think some near-term opportunities were lost, right?
Eric Blashford: Sure. What has happened is the near-term opportunities have pushed to the right a bit. The whole market is market is moving to the right a bit. And I think it has to do with maybe timing, some COVID, some has to do with the leasing of certain waters. So we still feel very optimistic about offshore. It is, as I have mentioned before, it is more than aspirational. We believe it is real and it is a real opportunity for us, and we continue to investigate how we might take advantage of that given specific points of entry, whether it be a factory for wind turbine towers themselves or some other point of entry. As far as competitive advantages, since we work with really all 4 major OEMS, we are certainly producing for three of the four now. We feel that we can service any one of those turbine OEMs, and they all have aspirations for that market.
Unidentified Analyst: Understood. But just in terms of technological capability, there is nothing that you like that others may as special cans for?
Eric Blashford: No. Not as far as our capabilities, as we have the capability to produce some sizes of offshore in certain towers in our Manitowoc facility with some moderate investment at this time. But as far as the technology, our know-how and knowledge, we are very well equipped to take advantage of that market because we have built so many different towers for so many different OEMs in our history.
Unidentified Analyst: Understood. Good to hear that. Moving on to the Gearing segment, it seems that there could be opportunities there, especially most recent quarter, you have seen a nice order book build there. Going forward, do you see the Gearing segment becoming a larger proportion of your total business in the next two, three, four, five-years?
Eric Blashford: Well, certainly seeing think that over the longer term, it is a little bit difficult to predict. But over the midterm, we certainly see some tailwinds for that particular segment in terms of opportunities with really all of the markets that we serve. That is the segment that serves the most disparate distribution of customers, and we have a lot of interest in our markets such as in material handling, marine, oil and marine, oil and Certainly, we are in the early innings of a recovery, and that business has been pressured for the last 12-months. But the quoting activities have been pretty strong the last several quarters. You saw the orders really jump this quarter. So it appears that customers are beginning to make purchasing decisions again and increase their inventories we think we are well positioned to grow that throughout the year. And as you know, that can lead to some gross margin growth within our expansion within overall broad as a result.
Unidentified Analyst: Yes.
Eric Blashford: What is of note is, I mean, is those purchases from those customers tend to be capital purchases, either new capital expenditures within their businesses or repairs. And with the growing economy, customers are starting to be more willing to do capital investments.
Unidentified Analyst: Yes. Yes. Just a couple of bookkeeping questions. The ERC that you have approximately $60 million in the next quarter - or rather 2Q, do you expect any more in the later half of 2021, the ERC benefit?
Eric Blashford: ERC.
Jason Bonfigt: ERC, I think it is too early to make that call. At this point, we are just planning on a $6.5 million approximately of cash proceeds to be received in the first half, and then we'll evaluate the business in the second half to see if we qualify again.
Unidentified Analyst: Yes. And sort of related one, last one. Of the $9.2 million, you got $300,000. Is there any visibility on the other remainder of the amount? I know you said something in the commentary, but can you just give us some more insight into when you expect that to happen?
Eric Blashford: We have answered several follow-up questions from the SBA and our lender late in Q1, early Q2. So we are optimistic that these will be forgiven here in Q2, but it may slip into Q3. It is just a little unprecedented, and there are quite a few companies that are submitting their forgiveness applications at this point. So we'd expect that lump to have to just roll through the snake here over the next several quarters.
Operator: Our next question is from Justin Clare of ROTH Capital Partners.
Justin Clare: So I guess, first off, given the challenges that you have seen for securing tower internals, we have seen raw material price increases. And then logistics has been kind of a widespread issue across the economy. What is the risk that we could see some delays in your ability to deliver on your customer orders. And then also, is there any risk that customers could actually push out orders as they may not want delivery right away?
Eric Blashford: Well, I would say that the supply chain challenges that we have been we have been facing have started to - I'm cautiously optimistic, they are starting to subside. I think I mentioned on 1 of our earlier calls that even shipping containers were a challenge before that has apparently begun to lighten a bit. So in Q2, we are starting to see a pretty good improvement in the deliveries. I'm not saying that, that is a sure thing, Justin, going forward. But we certainly believe that the worst is past us. I know India is being hit now. So if that is spread to the rest of the world that could be a potential risk. But at this point, things are appearing to improve. As far as our customers and pushing things out to the right, that is really hard to predict. I'm aware of some of that, that could be happening, but I haven't heard of anything really substantial that I can share at this time.
Justin Clare: Okay. And then I guess, just want to get your thoughts on the potential to that customers might push things to the right? I would think that they want to make sure that they get projects slated for this year completed so they can qualify for the PTC. But then there could be some projects maybe early 2022 push to the right. There may be some possibility there. But how is your order book shaping up for 2022 compared to past years?
Eric Blashford: Well, I will say, at this time of the year, it is quite early to talk about 2022. But what I will say is customers have begun to inquire as they normally do, about available capacity to both of our plants. So while it is early, Justin, we are getting interest. So that is what I can share at this time.
Justin Clare: Okay. Okay, great. And then you mentioned that imports are continuing to impact the business here. I know on a preliminary basis, you have seen some favorable results for the most recent tower trade case. So just wanted to get a little bit more color on what's happening there. Do you anticipate a change in a reduction in imports ahead here? Or do you think we need to see final results on the trade case before there is a meaningful shift in the landscape?
Eric Blashford: Well, what I can report to you, Justin, as of April, there were preliminary findings for counter-billing duties against Malaysia and against India. There is a recent antidumping preliminary finding against Spain. So with those, I would expect somewhat of a dampening effect, which tends to happen once these preliminary findings are released. But again, as I think we have shared before, these things won't be fully resolved until Q3. They have been resolved a little bit earlier than that. But they won't be fully resolved until Q3. So yes, I think we should be able to see a dampening impact on imports, but I can't be certain until the final determinations are done, which would be in Q3.
Operator: Our next question is from Martin Malloy of Johnson Rice.
Martin Malloy: I just want to follow back up on the offshore wind topic. And we have seen some announcements regarding facilities moving forward in New York and New Jersey here. And it looks like 2024 is going to be the year where we have installations really ramping up. Can you maybe help us think about the timing that you would need to build a new Greenfield plant on the East Coast? When would you need to be awarded contract or contracts to support a Greenfield facility and announce it? Would it be in the next six to nine-months in order to meet the time line of the developers?
Eric Blashford: Well, there is at least a 10-year projection of increasing installation. So we certainly have plenty of time to take advantage of that. But to take advantage of the earlier year, you probably need to make a decision in the next year. We are thinking between 18-months to two-years max, we could get from the first shovel of dirt to a meaningful output in terms of sections per week, Marty. So I think we have got time. And we are looking with multiple states and multiple sites to see how we might address that market.
Martin Malloy: Okay. Okay. And then just wanted to ask you on the gearing market. And obviously, commodity prices are up a lot and seeing a lot of talk about expansion projects or Greenfield projects going forward. Looking back to past commodity cycles, can you help us maybe think about the timing of when you really start to see the impact for demand for your components?
Eric Blashford: I can give some history here on the oil and gas side. That has been as high as $20 million of annual sales. We are well below that at this point because orders have been lagging the last several quarters. So we did see a rebound in Q1. And mining is another component that is going to be tied to what you are discussing. And that has been a more significant portion of our business as well, not to the extent of what I have talked about in oil and gas. But there is some room to run. And again, I think we are starting to hear more from our customers on growth expectations.
Eric Blashford: Yes. The one market, Marty, that Jason had mentioned was steel. And we know there is a lot of demand for steel. And as the mill starts to ramp up, they start to look at their at their maintenance demand for steel and as the mill starts to ramp up, new and replacement gearing for the steel market as well.
Jason Bonfigt: So historically, we have been above $40 million in annual sales in the last several years. We have that as a target, a near-term target. Last year, we are at 25%. So we are expecting to build off of that throughout this year and build up to that range.
Martin Malloy: Okay. And then my final question, just on the pressure reduction system. I think it is really interesting. And just wondering, are there other new products that we should look out for in this area related to natural gas compression, transportation, regas or perhaps even would LNG be within your capabilities of doing something there on the regas side?
Eric Blashford: Well, the answer is the growth in LNG certainly helps our Industrial Solutions segment because that particular market allows the export of LNG from the United States to other parts of the world. So that helps the industrial solutions that the facility we have in North Carolina. But what we are aware of and we are taking a look at it, it is very early, Marty, but this pressure reducing system that we have that is designed for natural gas can also be used for hydrogen. And we definitely see that as it is the fuel of the future. It is kind of out there. But we are mindful that our technology can be used for that, and we are starting to talk with some customers about how we can get some early tests out there for that possibility. Okay. And this would be related to hydrogen that is compressed. And then at an end customer or feeling station it would need to be 1a. Yes, we are the back end. This product is for the back end, the decompression at site.
Martin Malloy: Yes. Great. Okay. Well, thank you for your time this morning.
Operator: We have reached the end of the question-and-answer session. I will now turn the call back over to Eric Blashford for closing remarks.
Eric Blashford: Thanks everyone for interest in our company. We are certainly excited about some great things that are going on with our company and we look forward to speaking with you again, to discuss our second quarter results. Thank you.
Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
