Q1 2024 Broadwind Inc Earnings Call

Participants

Thomas Ciccone; Chief Financial Officer, Vice President; Broadwind Inc

Eric Blashford; President, Chief Executive Officer, Director; Broadwind Inc

Eric Stine; Analyst; Craig-Hallum Capital Group LLC

Justin Clare; Analyst; ROTH MKM

Martin Malloy; Analyst; Johnson Rice & Company L.L.C.

Amit Dayal; Analyst; H.C. Wainwright & Co., LLC

Presentation

Operator

Greetings, and welcome to Broadwind's first-quarter 2024 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, Mr. Tom Ciccone, Chief Financial Officer. Thank you. You may begin.

Thomas Ciccone

Good morning and welcome to the Broadwind first 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 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 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 solid Q1 results, highlighted by improved margin realization, higher net income and increased adjusted EBITDA, even though revenue was down from the prior year quarter. Offsetting a transitional pause in new wind tower demand, first quarter results benefited from a higher value sales mix, price discipline and targeted cost reduction actions to yield improvement in gross margin and EBITDA margin of 330 basis points and 270 basis points respectively. This marks our fifth consecutive quarter of profitability despite lingering win-related headwinds.
We booked $29 million of orders in the first quarter, a decline as compared to the prior year period, but up nearly 44% sequentially versus Q4 2023, continuing the favourable order trend across all divisions, which began in the second half of last year. Gearing orders increased sequentially across all markets led by wind, mining and energy. We also continue to see strong activity levels from the natural gas turbine market served by our Industrial Solutions segment, driven by global electricity demand growth and a shift away from coal-fired power around the world.
At a commercial level, we continue to expand 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 remains on track for the third quarter, and we'll include a version designed to accommodate RNG or renewable natural gas. We're expanding our portfolio of industrial fabrications to include new products, and we're seeing increased customer interest from the defence industry. Now that our ITAR certifications are complete for both have the heavy fabrications and gearing divisions.
I tower or International Traffic in Arms Regulations as the United States regulatory control program to restrict the export of defence and military related technologies to safeguard US national security. Furthermore, the gearing division is progressing towards its AS9100 quality certification, which we expect to earn in Q4, opening further opportunities in aerospace and defence for our gearing products.
Operationally, we're seeing the favourable impact from our efforts to lean out our manufacturing processes from quote to shipment, removing waste and improving individual accountability throughout the production process. Our focus on team member safety training has yielded a 50% reduction in our recordable incident rate in Q1, which was already trending below industry average, and we are very pleased to have had zero lost time incidents.
Our quality systems, standard work deployment and flexible skills training have allowed us to improve our response time and increase the profitability of smaller of the smaller qualification runs often associated with new customers. In recent quarters, we've taken significant actions to align our cost structure with the current demand environment. In combination these actions will contribute more than $4 million in annualized cost savings beginning with the first quarter of this year.
While total revenue declined versus year ago levels, given lower tower demand, our non-wind activity levels remained stable. As we see stable demand for our precision manufacturing capabilities across multiple markets. In Q1, we generated adjusted EBITDA of $4.2 million and net income of $1.5 million, nearly double the prior year period.
[Porting] activity in our non-wind markets has been robust so far in 2024, and we expect a good order flow this year, notwithstanding the continuing softness in the oil and gas gear market, which we believe will continue for the next several quarters.
Within our Heavy Fabrications segment, Q1 revenue was $22 million, down 30% from a year ago, primarily due to the decline in tower production, partially offset by increased sales of mining equipment and our natural gas pressure reducing systems. Gearing revenue was $8.3 million, a 30% reduction year over year due to broad-based softness across major markets.
However, our book to bill and gearing was 1.3 times indicating the ongoing recovery in this business. Industrial Solutions revenue was $8 million, up 47% year over year, led by increases in both new and aftermarket gas turbine content, continuing the positive trend for this business, which began in 2022.
In summary, I am pleased with the operating performance of all divisions. For the first quarter, as we took quick and substantial cost actions in response to demand fluctuations in both our Heavy Fabrications and Gearing units to deliver favourable results for the quarter.
With that, I'll turn the call back over to Tom for a discussion of our first quarter financial performance.

Thomas Ciccone

Thank you, Eric. Turning to Slide 5 for an overview of our first quarter performance. We delivered our fifth consecutive quarter of profitability during a period of softness within the onshore wind industry sector, highlighted by meaningful margin expansion resulting from a higher margin sales mix and targeted cost reductions.
In Q1, we generated $4.2 million of EBITDA compared to $4.1 million in the prior year quarter. We generated net income of $1.5 million, or $0.07 per diluted share in the first quarter compared to $0.8 million or $0.04 per diluted share in the prior year quarter.
Turning to Slide 6 for discussion of our Heavy Fabrication segment. Q1 orders of $11 million are down 45% versus the prior year period, primarily due to reduced wind tower orders. Tower related orders continue to be limited as a result of the existing backlog that originated as part of a significant supply agreement for wind tower purchases entered into in Q4 '22.
We did see an 18% increase in orders for our non-wind revenue streams, primarily related to our mining and industrial markets. First quarter revenues were $22 million, down $9.6 million versus the prior year quarter. We sold 78 tower sections versus 140 in the prior year quarter. This reduced level of power sales versus the prior year is consistent with our previous commentary regarding the slowing of Abilene production late in Q4 in response to customer demand.
During the first quarter, we recognized segment EBITDA of $3.1 million, a decrease of $0.7 million versus the prior year period, primarily driven by the decrease in power sections sold. This was partially offset by a more profitable mix of products sold as well as some targeted cost reductions.
Turning to Slide 7. Gearing orders slowed in Q1 versus the prior year. Q1 orders totaled $10.4 million, a $2 million decrease versus the prior year quarter. 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. Orders did increase sequentially nearly threefold as we saw broad-based improvement across all tracked markets, indicative of our efforts to diversify into less cyclical end markets.
Segment revenue was $8.3 million, down $3.6 million compared to the prior year quarter, and EBITDA decreased $0.6 million to $0.7 million, reflective of the lower sales volume.
Turning to Slide 8 for a discussion of our Industrial Solutions segment. Industrial Solutions had another strong quarter with revenue of nearly $8 million. This represents the strongest revenue quarter for the segment since the Red Wolf acquisition in 2017. Orders of $7.3 million remain at historically higher levels and were up both sequentially and versus the prior year quarter.
Our backlog of $16.1 million continues to remain at an elevated level as we continue to see strong demand for our core natural gas turbine offerings. First quarter segment revenues benefited from the relatively strong backlog we've been carrying throughout 2023 and into Q1. EBITDA increased to $1.9 million from $0.8 million in the prior year quarter, consistent with the increased revenue and a more profitable mix of products sold when compared to the prior year.
Turning to slide 9. At the end of the first quarter, our revolving line of credit was undrawn, and we had cash and availability under our credit facility of over $22 million. As we noted last quarter, during Q1, we collected the remaining $7 million of 2023 AMP credits and were able to reduce our net debt, inclusive of finance leases by over $3 million.
During Q1, we experienced an increase in operating working capital of nearly $5 million. This was driven primarily by a decrease in our deposit balance as we changed terms with a major customer. We furthermore anticipate operating working capital to continue to increase over the balance of 2024 as our deposit balance decreases and our AR balance increases consistent with the change in terms as well as our expected mix of customers.
Finally, with respect to our financial guidance, today we are introducing financial guidance for the second quarter of 2024. Given current expectations and beliefs, we anticipate second quarter revenue to be in a range of $37 million to $39 million and adjusted EBITDA to be in a range of $2.5 million to $3.5 million.
That concludes my remarks. I'll turn the call back over to Eric to continue our discussion.

Eric Blashford

Thanks, Tom. Now allow me to provide some thoughts as we enter Q2. Beginning with our Heavy Fabrications segment, we believe domestic onshore wind activity is poised to accelerate meaningfully in the 2025, 2026 timeframe given current indications of interest from customers. Although a higher interest rate environment has 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 repurposing talent and available capacity toward non-wind demand across our diverse and markets. We remain highly constructive on the long-term economics of wind, particularly with the 10-year tax credit visibility afforded by the IRA.
In our Gearing segment, average to broaden our sales mix into less cyclical markets continue, positioning us to realize a more balanced stable revenue profile. We added another experienced commercial sales agent to our team to expand our penetration into new precision machining markets, but the OEM customers in need of our unique five access capabilities from large, diverse non-gaming applications. Polling activity is up more than 250%. And we're pleased that our commercial strategy is yielding increasing opportunities for diverse growth.
In Industrial Solutions, we are seeing significant signs of momentum in the gas turbine industry, both in the demand for new products and on the services aftermarket side. Our quote activity in this sector is up over 40% from the prior year. As a result, we are continuing to invest in both additional personnel and equipment to manage the growth that we are experiencing and to be responsive to the time sensitive needs of our customers in this sector.
Concurrently, we are continuing our work with our key partners in both the wind repowering and solar markets as we focus our efforts on growing in these key energy transition markets.
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 pivoted our cost structure during a transitional period for domestic onshore wind demand, while retaining and redeploying our highly skilled workforce. We continue to build a firm foundation for steady, profitable growth serving the energy transition and other key markets and look forward to capitalizing on improved demand in the years ahead.
With that said, I'll turn the call over to the moderator for the Q&A session.

Question and Answer Session

Operator

(Operator Instructions)
Eric Stine, Craig-Hallum.

Eric Stine

Hey Eric and Tom.

Thomas Ciccone

Good morning.

Eric Blashford

Morning Eric.

Eric Stine

So maybe can we just start with the changed terms with the new customers? It sounds like that will weigh on working capital here, did in first quarter and will for the foreseeable future. Just curious, is that something that is kind of a one-off with this specific customer? Or is this something that is more indicative of maybe working capital trends going forward?

Thomas Ciccone

I would say it's more specific to this particular customer happens to be a major customer. So it's rather significant to us. So yeah, we did -- our operating working capital increased about $5 million in Q1 and not a lot of that was related to our deposit balances. You can see from looking at our balance sheet, we do put -- we do anticipate that trend to continue from the deposit perspective as well as receivables should increase as well during the year.

Eric Stine

Got it. I mean, anything that you can share in terms of what changed, I mean is this have to do with whether it's conditions of the relationship between the two parties or just the nature of business between the two parties, anything there would be helpful.

Thomas Ciccone

I would think the latter, just nothing specific that we can point to just the nature of the business between the two parties, I think okay.

Eric Stine

Okay, got it.

Eric Blashford

What I would say, Eric, is that it's actually returning to terms that were in place several years ago. So it's a return to normal terms.

Eric Stine

Okay. All right. And then maybe just on the wind side. And obviously, it's pretty, it's a challenging environment right now, but it sounds like you're getting a little more optimistic. Should we take that to mean that orders, I mean, potentially you think you could start to see an order pickup in late '24. So it really, I mean, obviously would not impact the results of this fiscal year. But that's how we should take your commentary?

Eric Blashford

Yes, I think so. I think our customers believe as do we that the industry, the wind power industry onshore, has hit a trough and we're kind of heading up the other direction. In that trough, I would use the term cautiously optimistic about late '24 into '25 and more bullish into '26. I would say, yes, our order activity should increase late '24 into '25 and through '25 and '26.

Eric Stine

Got it. Any -- or maybe I know you've aligned the cost, but you've also refocused some of the capacity in Abilene to other end markets. Maybe just delve into that topic a little bit and is there a time where you see and maybe it is late '24 when you start to see orders from other OEMs, other than GE and the big one that you have.

Eric Blashford

Yeah, I would say there is interest by all four OEMs, most directly three of the four major OEMs in capacity in that Abilene plant. We are producing our PRS systems. Those are the pressure reducing systems in Abilene and in Manitowoc. They really don't interfere with our wind tower production, but we do transfer labor in between.
So I would say that the chance for us to have multiple OEMs in that factory in '25 into '26 is as certainly possible, there's interest, but there's also interest in our northern plants as well. As I mentioned before, it's less aggressive or less robust than the Texas region where we have at the Abilene plant but interest is increasing in the northern plants as well. Both in terms of new towers but especially in terms of repowering activity which we produce in our northern plant.

Eric Stine

Got it. That is good to hear. And lastly, just last quarter this quarter as well, talking about aerospace and defence and some key certifications that you've received. I mean, how do you think about this business? If you look to '25 or '26, is that when you start to see this become a more meaningful part of the business or should we think about it, it's further out than that.

Eric Blashford

I would say '25 and '26 definitely especially in gearing. And what these certifications do for us is we've had inquiries from defence and aerospace customers before, but sometimes or terms and conditions require a certification or the ITAR certification, which is defence for the AS9100, which is aerospace. And and we've had to, no bid on some of those opportunities, where we wanted to get inside that fence, if you will, inside the perimeter.
And now with ITAR, we are getting more activity inquiries from the defence industry in both heavy fabrications and gearing and the AS9100, the customers were advertising to the customers that we should have that by Q4. And that's really increased activity in gearing from the aerospace standpoint. So I'd say I would definitely expect activity in '25 to the actual order and revenue activity in '25 increasing through '26 and beyond.

Eric Stine

Okay. Thank you.

Thomas Ciccone

Thanks Eric.

Eric Blashford

Thanks Eric.

Operator

Justin Clare, ROTH MKM.

Justin Clare

Yeah, good morning.

Eric Blashford

Good morning, Justin.

Justin Clare

Morning. Wanted to just go back to wind demand, it sounds like you could potentially see a pickup in orders towards the end of this year. Was wondering if you do see that pickup, would you expect to be booking for orders to be delivered in 2025? Or is it more likely into 2026 at that point? Just based on what you're hearing from your customers, what might we expect here?
And then based on what you're seeing now, what's the potential to increase your wind tower manufacturing utilization in 2025 relative to '24.

Eric Blashford

The answer I think is yes. And yes, I have a lot of confidence that we will see capacity utilization in '25, increase, maybe not for full capacity in the Abilene plant or the Manitowoc plant, but certainly beyond what we're producing at now. So the orders that we expect to start getting towards the end of 2024 and into '25 will be produced in '25 and '26.
As I mentioned earlier, the aftermarket or the repowering sector, which we're getting bigger into especially amounts walk, those orders are more quick turn. So those orders will come in '24 and be delivered in '25 -- throughout 2025. Towers have a little bit longer lead time, Eric, but I do believe I'm sorry, Justin, but I do believe we'll see both, increased activity in '25 through '26.

Justin Clare

Got it. Okay, great. And then on Industrial Solutions, it looks like the EBITDA margin was 24% in Q1 so pretty meaningful improvements from what we've seen historically. I was wondering if you could just speak to what drove the improvement a bit more. Was this a function of mix in the quarter or the cost reduction efforts that you are undergoing here? And just trying to think through how should that trend going forward? Is it a sustainable improvements in the margin that we should be anticipating for that segment of your business?

Thomas Ciccone

I think you'll have some sustainability of that margin profile. But I think Q1 was especially have a favorable margin profile just because of the sales mix that they experience. So I wouldn't point to that segment from a cost cutting perspective by any means. But I think a lot of it had to do with the very favourable mix of product that they sold as well as the operating leverage that they've had. So $8 million of revenue for that segment is the highest that we've seen out of them. So it really help -- their bottom line it really helped their margin to get as much out of that facility that they did.

Justin Clare

Okay. Got it. And then just on the -- so Biden just increased tariffs with the Section 301. So it looks like the tariff rate on steel increasing to 25% this year from 0% to 7.5%. So just wondering how this might impact your business, I believe you primarily source steel domestically though we could see potential price increase. So just if you could speak to any potential impact on your business here?

Eric Blashford

Well, I think Justin is, we don't anticipate significant impact on the business. Certainly, in the what I would call the short term to maybe the midterm, we do source virtually all of our tower steel from domestic sources and certainly the vast majority of our steel for Heavy Fabrications from domestic sources. So it could have an impact, but I don't expect that have a major impact in the short term.

Justin Clare

Okay. And the increase in the price would be a pass through for you? I believe.

Eric Blashford

Yeah, it would be -- Yes, it would be pass. I do believe there's available capacity of this steel of the plates plants to produce for wind turbine, OEMs in the United States and wind power producers like Broadwind. So I think you'd have to fill that capacity for it have any real price pressure.

Justin Clare

Okay. Got you. Thank you.

Eric Blashford

Thanks, Justin.

Thomas Ciccone

Thanks, Justin.

Operator

Martin Malloy, Johnson Rice.

Martin Malloy

Thank you for taking my questions. Was there any impact from the advanced manufacturing tax credit on the EBITDA for the Heavy Fabrication segment?

Thomas Ciccone

Not unlike Q1 of last year, the AMP credit existed in both quarters. So outside of the volume impact, we were down approximately 50% in terms of the number of sections that we sold. But the margin profile that was consistent between the two quarters.

Martin Malloy

Okay, I appreciate that. And then just in terms of the potential acquisition front and you've got the NOLs, your balance sheet is strong. Can you maybe talk about what you're seeing there in terms of the flow potential opportunities?

Eric Blashford

Yeah. Thanks, Martin. We are seeing -- we put that on pause a little bit for the last quarter of last year as we work through these cost reductions to make sure we had good cash generation for building up a war chest, we now feel like we're certainly there or nearly there. So I'm beginning to entertain more aggressively opportunities in M&A, primarily in precision manufacturing, precision machining, which is what we do have most of our plants, our gearing plant or our Heavy Fabrications plants. So the flow -- the opportunity flow is increasing and we're able to, I think have more seriously address those as they come in.

Martin Malloy

Okay, great. Thank you very much. I'll turn it back.

Eric Blashford

Thanks, Martin.

Thomas Ciccone

Thanks Martin.

Operator

Amit Dayal, H.C. Wainwright.

Amit Dayal

Thank you, good morning, everyone.

Eric Blashford

Hi Amit.

Amit Dayal

Hey, just sticking with the wind, Eric side of the story. Is there any particular catalyst for the wind business to get going again that we should be sort of monitoring? Or is this just going to be just a general development across the industry that may take place later this year or early next year?

Eric Blashford

Well, I think is, as I look at it, there are three things. There's interest rates, inflation and interconnection. And I think inflation's kind of been capped or at least it's under control. Interest rates fall the Fed like the rest of us do. And it feels like that they're going to hold maybe a slight reduction. So I think that is offering some stability.
And then you have an end -- I'm sorry, that's stabilities is allowing some developers to pencil in some projects that maybe weren't fully profitable, or provided enough return for them with a higher interest rate environment.
But lastly, is the interconnection piece. That's a third eye, and even just last night -- Monday night in the Wall Street Journal, there was an article about Washington trying to break Powergrid log jams, and that's the infrastructure that's a whole infrastructure play that I mentioned earlier.
So what's happened recently, again, I draw your attention to The Monday Wall Street Journal framework, which is the Federal Energy Regulatory commission up finalized a couple of new rules and a couple of new rules really are intended to increase permitting opportunities for critical projects and areas lacking transmission capacity and also, they require utility companies to look to a multi-decade trend.
What does that mean? What that means is, as renewable projects coming online in one geographical region versus another. There's always this risk of a weather-related problem. But I think what this is intended to do is to encourage interconnections to be easier for these particular operators, so they can more easily invest in renewable projects without fear of any disruption.
So that's kind of a long-winded answer. But what I'm meaning to say is I think the federal government understands that there are some headwinds with regard to renewable projects in the way of permitting, and they're trying to break down those headwinds, break down those barriers.

Amit Dayal

Thank you for that. That's very helpful. And then on the revenue diversification front, it looks like you guys are making good progress over there. Is there room to grow within the existing non-wind customers or are you looking to sort of, you know, continued expanding the roster of clients. I know you mentioned the aerospace opportunity in your comments earlier. Just trying to see how that diversification effort -- what are the drivers that will lead to, you know, more balanced revenue?

Eric Blashford

So we've made -- Yeah, that's a great question, is I've mentioned before, in the northern plant because we're not full up with tower capacity there, we have capacity available capacity to deploy to these other diverse markets, such as material handling as I mentioned earlier, defence infrastructure. Within the Gearing segment we've made some nice investments in some five excess machinery that can handle very precise machining for very large, relatively large products.
And we do have available capacity as an example, some of those machines are operating at maybe 30% to 40% capacity now, that's intentional because we invested in additional capacity in preparation for these new markets. So I don't think you need to look for [balancing] expand our brick-and-mortar footprint to be able to access these markets. It's more increased utilization for our available and our newly invested assets.

Amit Dayal

Okay. Understood. And yeah, that's all I have guys. I'll take my other questions offline. Thank you so much.

Eric Blashford

Thank you.

Thomas Ciccone

Thanks.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Eric Blashford for closing comments.

Eric Blashford

Yes. Thank you, everyone, for your interest and your attention. We're pleased with our results in Q1 and look forward to coming back to you after Q2 to present our results then. Thank you, everyone.

Operator

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