Broadwind, Inc. (NASDAQ:BWEN) Q4 2023 Earnings Call Transcript

Broadwind, Inc. (NASDAQ:BWEN) Q4 2023 Earnings Call Transcript March 5, 2024

Broadwind, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.04.
BWEN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Broadwind’s Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Ciccone, Chief Financial Officer. Thank you. You may begin.

Tom Ciccone: Good morning, and welcome to the Broadwind fourth 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 fourth 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. 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. Broadwind delivered strong full year results, highlighted by record margin realization, net income and adjusted EBITDA. While 2023 was a transitional period for domestic onshore wind developments, we continue to drive organic sales growth within our core industrials, mining and energy markets through a combination of new contract wins, together with increased customer demand for our proprietary Pressure Reducing System, or PRS, technology. As we build momentum through our commercial strategy, our team has also continued to drive improved productivity and cost efficiency throughout the organization, consistent with an ongoing focus on sustained operational excellence.

We delivered a strong fourth quarter performance as well as our revenue, operating income and profitability all increased meaningfully above prior year levels, driven by a combination of increased wind tower sales, together with solid demand across our diverse markets. Our plants executed well during the quarter, allowing us to deliver the strong results. We booked $20.2 million of orders in the fourth quarter as activity levels declined from the near record levels in the prior year period. However, order rates increased on a sequential basis across all three reporting periods, a trend which is continuing into this year. Entering 2024, we continue to operate on plan. At a commercial level, we’re focused on expanding our product mix within higher-margin adjacent markets.

The release of the Broadwind clean fuels L70 low-flow PRS unit, the third model in this product family, is on track for this year and will include a version designed to accommodate RNG, or renewable natural gas. We’re expanding our portfolio of industrial fabrications to include new products, have finalized our ITAR registration and are pursuing an AS9100 quality certification to open more Gearing opportunities in aerospace and defense. Operationally, the lean operating principles, process controls and continuous improvement projects we’ve implemented at all locations are showing good results in asset utilization and productivity, with self-help savings totaling approximately $1.5 million in 2023. Our focus on team member safety, quality systems and flexible skills training has allowed us to continually meet the quality and delivery performance at varying volumes.

From a safety perspective, our recordable injuries and lost time incidents are trending favorably as we implemented our safety skills program across the company. In fact, we’re proud to have recently celebrated 16 years at our North Carolina facility without a lost time incident. For the full year 2023, we generated total revenue of $203 million, with a record-setting adjusted EBITDA of $21.5 million as all divisions posted strong performances. For the fourth quarter, we generated total revenue of $47 million with increases in the Heavy Fabrications and Industrial Solutions segments, offset a slight reduction in gearing. We generated $4.4 million of adjusted EBITDA in the quarter, an increase of more than $4 million versus the prior year period, continuing the strong performance we’ve seen this year so far.

Our total consolidated backlog at the end of Q4 was approximately $183 million, down from $297 million in the prior year period. Holding activity in our non-wind markets was stable in Q4 but has been robust so far in 2024, and we expect good order flow this year, notwithstanding softness in the oil and gas gear market. Within our Heavy Fabrication segment, Q4 revenue was $29.5 million, a 24% increase year-over-year, led by increases in wind tower sales, mining equipment and our PRS systems, offset by reductions in our construction and industrial markets. Gearing revenue was $11 million, a 5% reduction year-over-year due to reduced customer activity in oil and gas and mining, partially offset by strength in the steel processing sector. Industrial Solutions revenue was $6 million, up 29% year-over-year, led by increases in new gas turbine content, continuing the positive trend for this business which began in 2022.

In summary, I’m pleased with the operating performance of all divisions through the fourth quarter as we took quick cost actions in response to demand fluctuations in both our Heavy Fabrications and Gearing units to deliver favorable results for the quarter and for the full year 2023. With that, I’ll turn the call back over to Tom for a discussion of our fourth quarter financial performance.

Tom Ciccone: Thank you, Eric. Turning to Slide 5 for an overview of our fourth quarter performance. We had a strong fourth quarter. We experienced significant year-over-year growth in revenue, gross margin and EBITDA. In Q4, we generated $4.4 million of EBITDA compared to $0.2 million in the prior year fourth quarter. The greater than $4 million EBITDA increase and improved margin realization is due primarily to the benefits attributable to the advanced manufacturing production tax credits, or AMP credits, we have earned associated with our wind tower production, together with improved throughput and improved operational execution. We generated net income of $1.1 million or $0.05 per diluted share in the fourth quarter compared to a loss of $2.9 million or $0.14 per diluted share in the prior year.

Turning to Slide 6 for a discussion of our Heavy Fabrications segment. Fourth quarter orders of $10 million are down sharply versus the prior year period as we entered into a significant supply agreement for wind tower purchases valued at $175 million in the prior year fourth quarter. This is not typical for us as we usually receive orders at more regular intervals. Fourth quarter revenues were $29.5 million, up $5.8 million versus the prior year. We sold 132 tower sections in the fourth quarter versus 96 in the prior year quarter. Sequentially, tower sections sold decreased as we had less activity in our Manitowoc facility due to project timing, and we slowed Abilene production late in Q4 in response to customer demand. During the fourth quarter, we recognized segment EBITDA of $3.7 million, an improvement of $3.4 million versus the prior year period, primarily driven by the increased tower sections sold and the AMP credits recognized in the current year period.

It should be noted that while segment EBITDA was down sequentially, Q4 included $1.1 million of charges related to discounts and administrative fees recorded in December associated with the sale to monetize our 2023 AMP credits. Turning to Slide 7. Gearing orders slowed in Q4 versus the prior year. Q4 orders totaled $3.6 million, an $11.5 million decrease. The majority of the decrease was attributable to the reduction in oil and gas demand, given a decline in domestic development activity as producers are deploying relatively less capital for drilling. Segment revenue was $11.1 million, down $0.6 million compared to the prior year fourth quarter, but EBITDA increased $0.5 million to $1.3 million due to a more profitable mix of products sold and improved operational execution when compared to the prior year period.

Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions had another strong quarter with revenue in excess of $6 million. This represents the third consecutive quarter with a revenue total greater than $6 million, a quarterly revenue level only achieved once before 2023. Orders of $6.6 million were up both sequentially and versus the prior year fourth quarter, and our backlog of $16.1 million continues to remain at an elevated level and represents the third highest quarterly total since acquisition. We continue to see strong demand for our core natural gas turbine offerings. Fourth quarter segment revenues benefited from the relatively strong backlog we’ve been carrying throughout 2023. EBITDA increased to $1 million from $0.7 million in the prior year period, consistent with the increased revenue when compared to the prior year.

Turning to Slide 9. At the end of 2023, we had cash and availability under our credit facility of nearly $23 million. As expected, we were able to deliver improved working capital efficiency during the fourth quarter with working capital declining $6.6 million sequentially. In December 2023, we sold approximately $15 million of AMP credits, less discounts, transaction fees and related expenses in conjunction with the tax credit transfer agreement made pursuant to Section 45X of the Internal Revenue Code. We recognized $6.5 million in cash proceeds from this initial sale in December 2023, and the remaining $7 million balance was collected in February. As part of the tax credit transfer agreement, we have sold all of the 2023 AMP credits, and we’ll sell our 2024 AMP credits as they’re generated.

We expect to sell earned AMP credits and collect them more readily throughout 2024 and as such, expect to see a corresponding decline in our AMP credit receivable in 2024 when compared to 2023. Finally, with respect to our financial guidance. Today, we are introducing financial guidance for the first quarter 2024. Given current expectations and beliefs, we anticipate first quarter revenue to be in a range of $34 million to $38 million and adjusted EBITDA to be in a range of $1 million to $2 million. That concludes my remarks. I will turn the call back over to Eric to continue our discussion.

Eric Blashford: Thanks, Tom. Now allow me to provide some thoughts entering 2024, beginning with our Heavy Fabrication segment. Domestic onshore wind development activity is expected to gradually accelerate beginning in the second half of 2024. Even still, a higher interest rate environment and raw materials inflation have impacted project economics for some developers, leading them to temporarily delay or defer the timing of their investments. In the interim, we’ve aligned our cost structure to reflect a period of lower production volumes at our tower facilities while re-purposing available capacity towards non-wind demand across our diverse end markets. We remain highly constructive on the long-term economics of wind, particularly with the decade-long tax credit visibility reported by the IRA of which we remain a key beneficiary.

As mentioned in my earlier comments, we are expanding our position with several of our industrial fabrications customers to support multiple product lines for them. We requested and received our federal ITAR registration, which stands for International Traffic in Arms Regulations, from the Department of State, which opens new opportunities in the defense industry for us, an industry we are well-suited to support with the deep water port access we have at our Wisconsin facility, allowing us to deliver very large projects by barge. In our Gearing segment, efforts to broaden our sales mix into less cyclical markets remain ongoing, positioning us to realize a more balanced, stable revenue profile moving forward. In Q4, we took cost actions to align overhead expenses with demand and upgraded our commercial team to include stronger representation in our Central and Western regions.

Following recent process improvement and CI actions implemented in 2023, we’ve been able to respond to new market opportunities more quickly. To that end, our customer response times improved by more than 50% in the fourth quarter, and we expect an additional 25% improvement in this metric by midyear 2024. In Industrial Solutions, we are pleased to be expanding our share of market in the gas turbine sector, notably in the aftermarket, where quick response is especially vital to our customers as they deal with outages in the field, both planned and unplanned. We’ve upgraded our in-house engineering capabilities, added CNC machining capabilities, plasma cutting and packaging automation to improve throughput and reduce costs. We’ve also optimized our facility to accommodate our expected growth in the wind repowering and solar markets.

In summary, I am pleased with the strong operational performance from our team this year including the strong results we achieved in Q4. We were able to effectively pivot our cost structure during a transitional period for domestic onshore wind demand while continuing to retain our highly skilled workforce. We continue to build a firm foundation for steady, profitable growth, serving the energy transition in other key markets and look forward to capitalizing 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.

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Q&A Session

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

Eric Stine: Hi Tom. Hi Eric. So maybe just could we start with the Q1 outlook and maybe just talk about some of the puts and takes. You did talk about your expected utilization in wind. I would presume that you’d expect some weakness in Gearing. It seems as if Industrial Solutions is actually – is trending positively. So I’m just trying to kind of match up that commentary with whether it’s comparing it to last year’s Q1 or Q4, however you’d like to do it, that would be helpful.

Eric Blashford: Yes, you’re spot on, Eric. We ended 2022 with a pretty strong backlog in those divisions, both in industrial fabrication product line and in Gearing. Our bookings late in the year 2023 were soft. And so we’re entering this year with a softer backlog in Gearing in industrial fabrications. Now that’s changing because as I mentioned in my remarks, things are looking up sequentially and actually in this year. But that’s what you’re seeing in Q1 versus last year Q1.

Eric Stine: Okay. All right. That’s helpful. And then so it was helpful that you gave the 25% utilization for wind in Q1. Any thoughts – I mean I know a lot of factors go into this, but thoughts as to what that looks like kind of trending throughout the year? And I know that a big portion of that will be what is the timing of the kind of step back up in the big order that you and your customer jointly delayed. Maybe – I don’t know if that’s something that you’re able to do, but just maybe what that looks like throughout the year.

Eric Blashford: Yes. Well, as indicated, that’s a nice ratable order. The remainder – that specific order is ratable through ’24 and ’25. We certainly have capacity that we can fill and we’re actively looking to fill that with other customers. But as a reminder, we also have capacity using those same plants to do other industrial fabrications, which is why this higher quoting activity is going to manifest itself in the higher utilization for those plants. The 25% that I mentioned is just the tower capacity utilization, which is typical what you analysts are interested in. But the actual capacity utilization of those plants is a bit higher than that.

Eric Stine: Got it. And then maybe last one for me and just a follow-up. It’s the – so the wind, I mean, 25%, I would assume that, that is made up of this large contract and its ratable radical execution. And so you would think then that Q2, there’s not a whole lot of time to add, so maybe Q2 will look similar. And then Q3 and Q4, it really comes down to do the conversations you’re having to fill that capacity. Do those come to fruition? Do those turn into orders? Is that a fair way to think about it?

Eric Blashford: You’re correct. And that’s why we said that we believe our earnings profile is going to increase in – throughout the year. So the second half will be stronger than the first half, not because of what I mentioned about wind or what we discussed about wind, but because of the other businesses that we have that have such strong quoting. Now what I will say is what’s not included in that because we don’t guide on it would be adapter projects, and those would be wind. But typically, when I’m talking about capacity wind tower capacity, that’s what we’re talking about with the 25%.

Eric Stine: Got it. Okay, thank you. Thanks, Eric.

Eric Blashford: Thanks Eric.

Operator: Our next question is from Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Sameer Joshi: Thanks for taking my question. Just a little bit of clarification on the second half activity that you are expecting on the wind front, is this – are you expecting some kind of quoting activity and receiving orders at that time? Or do you see initial discussions about new towers – new wind plants coming up and then subsequently, you’re getting orders for 2025 and beyond.

Eric Blashford: Yes. I would think the industry, in general, considers 2024 a transitional year as it heads and ramps up into ’25, ’26 and ’27. And that’s indicated by the graph we have in our presentation and also supported by just general industry beliefs. So your question, I would love to have orders received in 2024 that we could still produce in 2024, but I think the more likely scenario is we’re receiving orders in 2024, which we would begin to build in 2025 and beyond. With the exception, as I mentioned earlier, of adapters, which we can respond a lot faster to adapter orders because of the length of – the lead time length is shorter.

Sameer Joshi: Understood. Just switching gears, the PRS system that you have, can you give us some sort of a qualitative – like how is it being received? And what is the demand over the next couple of years for this that – or contribution to your revenues from this?

Tom Ciccone: Yes. What I can tell you is we anticipate PRS is becoming a bigger part of our overall value mix. We were just over about $10 million in ’23. We anticipate that being closer to $20 million for ’24. So that’s our goal for ’24. It does provide nice strong margins for us and it is a growing part of our business.

Sameer Joshi: Understood. And then the last one for me. On the AMP credits that were sold, have you disclosed what kind of a discount was given? And now that you’re going to do it on an ongoing basis as you receive those credits, do you expect any discounting there? Or should we look at accounting for that?