Broadwind, Inc. (NASDAQ:BWEN) Q1 2023 Earnings Call Transcript May 11, 2023

Broadwind, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $-0.05.

Operator: Greetings, and welcome to Broadwind’s First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Ciccone. You may begin.

Thomas Ciccone: Good morning, and welcome to the Broadwind First Quarter 2023 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 first 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 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 in the press release issued today. I would like to inform you that Broadwind filed its definitive proxy statement and related proxy materials with the SEC in connection with the 2023 Annual Meeting of Stockholders and in connection therewith, its directors and certain of its executive officers are participants in the solicitation of proxies from our stockholders in connection with such annual meeting. Stockholders of Broadwind are strongly encouraged to read such proxy statement and all other related materials filed with the SEC carefully and in their entirety when they become available as they will contain important information about the 2023 Annual Meeting, including the identity of the participants in the solicitation and their direct or indirect address by security holdings or otherwise.

At this time, we will make no further comment on the nominations made by WM Argyle Fund or any matters or discussions related to WM Argyle Fund or its nominations. At the conclusion of our prepared remarks, we will open the line for questions. With that, I’ll turn the call over to Eric.

Eric Blashford: Thanks, Tom, and welcome to those joining us today. Our first quarter results demonstrate a strong start to the year as sustained demand across diverse end markets, improved margin realization and consistent operational execution contributed to significant year-over-year growth in profitability. The green shoots first evidenced as we exited last year continued into the first quarter. As indications of interest from OEM customers, together with continued stability across our diverse, non-wind markets, have contributed to improved visibility and optimism across our business in 2023 and into 2024. We’ve recently announced several significant new business winds, including the $175 million in new tower orders followed by a record $8 million order for our proprietary mobile Pressure Reducing Systems, or PRSs, and related accessories in April.

These orders reflect positive business momentum within our legacy wind business, together with significant traction within new, higher-margin adjacent markets that leverage the unique intellectual property we are developing here at Broadwind. Importantly, this performance reflects meaningful progress on our strategic plan, which emphasizes profitable growth across a broader spectrum of energy transition and clean tech opportunities. As we further expand our product and service capabilities, we expect to drive improved asset utilization and unit economics consistent with our focus on driving improved margin realization through the cycle. We booked $40 million in orders in the first quarter, down about 25% from the prior year quarter as expected, given the pull forward of the large multi-year tower order we received in December 2022.

The timing of these tower orders was partially offset by a more than 100% increase in our industrial fabrications orders, which include of our proprietary PRS product line. Entering the second quarter, we continue to operate on plan both at a commercial and an operational level. Commercially, we are staying disciplined on price as we pass along inflationary cost increases to our customers. We are also negotiating improved contract terms and prudently managing our cash and liquidity to ensure adequate working capital availability as we grow. We’re also focusing on expanding our product mix within higher-margin or profitable adjacent markets as reflected by our recent PRS product launches. Operationally, we continue to deploy lean operating principles across the organization, including continuous improvement projects across all divisions with an emphasis on improved asset utilization.

We’ve continued to focus increasingly on plant and process automation, positioning us to capture improved manufacturing efficiencies. This year, we’ve led a major retooling and automation of our coatings process at the Abilene plant, which is expected to be fully operational at the end of May 2023. We generated revenue of $49 million in the first quarter, a year-over-year increase of 17%, with each reporting segment posting double-digit gains. We generated $4.1 million of adjusted EBITDA in the quarter, an increase of more than $4 million versus the prior year period, resulting in a return to profitability in the period. Our Heavy Fabrications segment booked Q1 orders of $20 million, down 41% year-over-year as expected, given that we received the $175 million multi-year tower order late last year.

We’re pleased to see increasing strength in our Industrial Fabrications product line, with orders more than doubling year-over-year. Our gearing orders were $12 million, down 12% year-over-year, led by softening of incoming oil and gas orders, partially offset by increases in orders from the industrial and steel processing sectors. Orders for Industrial Solutions of $7 million continued to be strong, posting a 56% increase year-over-year led by orders for both new gas turbine builds as well as the gas turbine aftermarket. Our total backlog at the end of Q1 was $288 million, a 146% increase versus the prior year period. Quoting activity in our non-wind markets remain strong, and we expect good order flow to continue through the balance of this year.

Within our Heavy Fabrication segment, Q1 revenue was $32 million, a 16% increase year-over-year, with wind towers and other industrial fabrications posting gains of 12% and 31%, respectively. Importantly, our new proprietary product line, the Broadwind Pressure Reducing System or PRS, which is a vital part of the natural gas virtual pipeline system in North America, continues to perform well, with revenues up 65% year-over-year as we execute our strategy to expand in clean fuels. Gearing revenue was $12 million, a 13% increase year-over-year as customer activity continues to be strong within both the energy and industrial sectors. We are seeing the positive impact of our commercial strategy given 165% year-over-year growth in our Industrial segment this quarter.

In summary, I’m pleased with the operating performance of all divisions entering the year as we continue to execute our growth and diversification strategy. With that, I’ll turn the call back over to Tom for a discussion of our first quarter performance.

Thomas Ciccone: Thank you, Eric. Turning to Slide 5 for an overview of our first quarter results. We had a strong first quarter performance with consolidated revenues of $48.9 million compared to $41.8 million in the prior year quarter. The 17% increase was primarily reflective of the sustained demand strength and strong operational execution across our diverse end markets. Each of our operating segments generated year-over-year growth in both revenues and operating income. In Q1, we recognized $4.1 million of EBITDA compared to breakeven EBITDA in the prior year first quarter. Our strong EBIT performance and improved margin realization is primarily attributable to the higher overall volume level and the benefits attributable to the advanced manufacturing production tax credits or AMP credits.

We are, in this quarter, associated with our wind tower production. The AMP credits were introduced as part of the Inflation Reduction Act, which was enacted into law in 2022. The IRA provides for manufacturing tax credits associated with eligible wind and solar components. Manufacturers qualify for these credits based on the electricity output for each component produced and sold in the U.S. starting in 2023. It is also important to point out that we generated GAAP net income of $800,000 or $0.04 per diluted share in the first quarter. After adjusting for the $700,000 of proxy contest-related costs, we generated $1.5 million of net income or $0.07 per diluted share. Turning to Slide 6 for a discussion of our Heavy Fabrications segment. First quarter orders were comparatively limited at $20.2 million, a decrease from the prior year period and sequentially.

This decrease is attributable to the timing of the large multiyear $175 million tower order that was received late in 2022. Based on the timing of this order and the resulting near-record backlog that we’ve carried since year-end, we expect the orders to be limited when compared to prior periods where order intake levels reflected a more consistent project by project timing. First quarter revenues were $31.6 million, up from $27.3 million in the prior year quarter. Although we sold less tower sections versus the prior year period, we realized an increase in wind tower revenue as we had less customer supply material and increased steel costs, which is generally a pass-through to customers. In addition, we recognized a 31% increase in industrial fabrication product line revenue due to increased demand for mining customers as well as for our PRS units in the current year quarter.

During the first quarter, we recognized EBITDA of $3.9 million, an improvement of $3.3 million versus the prior year period, primarily driven by the AMP credits recognized in the current year period as well as the increased industrial fabrication product line revenue. Turning to Slide 7. Gearing orders continue to be strong in Q1, totaling $12.4 million. This represents a decrease versus the prior year first quarter but remains on pace with $13 million quarterly averaged experienced during 2022. Backlog increased again in Q1 and the resulting balance represents the highest reported level in recent history. Compared to the prior year first quarter, segment revenues increased 13% to $12 million, reflective of the comparatively stronger backlog that we entered 2023 with.

We generated $1.3 million of segment EBITDA in Q1, an increase of $0.8 million versus the prior year quarter, a result of the additional revenue, a more profitable mix of products sold and the lack of ramp-up costs incurred in the prior year. Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions recorded $7 million of new orders in Q1. This represents a $2.5 million or 56% increase versus the prior year first quarter. We ended the first quarter with a record high $17 million in backlog as we continue to see strong demand for our core natural gas turbine offerings. First quarter segment revenues increased to $5.4 million from $4.1 million in the prior year period due primarily to the strong order intake levels we’ve been experiencing and a large shipment for an international customer.

EBITDA increased to $0.8 million, consistent with the increased revenue as well as an improved mix of products sold when compared to the prior year quarter. Turning to Slide 9. Our quarter end liquidity remains adequate, with cash and availability under our credit facility of $12.3 million. As noted during the Q4 results conference call, we expect that our operating working capital to increase in Q1 as a result of higher AR and inventory balances consistent with the increased production levels as well as deposit balances decreasing to our new normalized operating levels. As such, we saw operating working capital increased sequentially, which was funded by our line of credit. We don’t anticipate any further significant increases in operating working capital for the balance of the year.

It should be noted that the AMP credits are not part of our traditional operating working capital calculation, but we do expect this receivable balance to increase during the year. Finally, as we announced on April 20, we are affirming our full year financial guidance. For the full year 2023, we currently anticipate total revenue to be within a range of $205 million and $220 million and adjusted EBITDA to be approximately $16 million to $18 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.

Eric Blashford: Thanks, Tom. In the near to medium term, we continue to view the Inflation Reduction Act of 2022 as a significant positive catalyst for the wind sector, as it provides the long-term policy certainty long awaited by developers. We believe that the IRA, supported by rising commercial and industrial demand, will support ratable growth in new wind installations beginning in 2024. Even as we await final IRS guidance, we are seeing renewed confidence at our wind customers given expectations for a more stable industry growth over the next decade. The AMP credits included in the IRA create a new production credit for domestic manufacturers of the components relating to clean energy, including our wind tower products.

As we look forward to the balance of 2023 and into the next year, we have increased visibility and a strengthened backlog in each of our operating segments as we build on our legacy in wind to expand into new adjacent clean tech markets such as clean fuels, solar and power and infrastructure. As mentioned earlier, in our Heavy Fabrication segment, we are adding coatings automation to improve our plant throughput, optimize labor and reduce costs as we continue to work with our customers to book capacity for towers and other industrial fabrications for 2023 and beyond. The line of proprietary Pressure Reducing Systems introduced last year is progressing as per our strategy, and we’re pleased with the favorable market response and order activity we’ve received for the new high flow model released this year.

We’ve also introduced a rental option for these units in response to customer demand. Given our current capacity, we expect to generate approximately $20 million in annual incremental revenue from this product line by 2025 at attractive margins. In our Gearing segment, we are seeing success with our efforts to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream going forward. Order growth from industrial and steel processing segments has been strong, and we’re seeing good response to our increased focus on gearbox repair and refurbishment services. And finally, our strategy to add process capabilities to our Industrial Solutions business to expand our share of wallet within existing accounts while penetrating new ones and improve margin profiles is yielding desired results.

In summary, I’m pleased with the progress our team is making to build a durable foundation for steady profitable growth and look forward to capitalizing on improved market demand in the years ahead. As wind and renewables investment activity gradually increases over the next several years, our strategy to prudently maintain our facilities, equipment and vital core talent positions us well to support an ongoing recovery in order activity. We will leverage the presence we have established within wind, clean fuels and power generation while establishing footholds within other complementary market adjacencies such as solar. Concurrently, we will drive capacity utilization, margin expansion and reduced net leverage, ensuring continued balance sheet optionality to support the long-term growth of our business.

With the successful execution of our strategy, we expect to generate significant growth in both revenue and income over the next several years as we more fully leverage our NOLs, with emphasis on long-term value creation. With that said, I will turn the call over to the moderator for the Q&A session.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Eric Stine with Craig-Hallum.

Operator: Our next question is from Justin Clare with ROTH MKM.

Operator: Our next question is from Amit Dayal with H.C. Wainwright.

Operator: We have reached the end of the question-and-answer session. I’d now like to turn the call back over to management for closing comments.

Eric Blashford: Yes. Thank you. We appreciate your interest in Broadwind. We’re excited for the way, you’re started, and we look forward to coming back to you after Q2. So give a report then. Thanks, everyone.

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