Broadwind Energy Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.27.13 | About: Broadwind Energy, (BWEN)

Broadwind Energy (NASDAQ:BWEN)

Q4 2012 Earnings Call

February 27, 2013 11:00 am ET

Executives

Joni Konstantelos

Peter C. Duprey - Chief Executive Officer, President and Director

Stephanie K. Kushner - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Mark B. Spiegel - Stanphyl Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Broadwind Energy Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Joni Konstantelos, Director of Investor Relations. Please go ahead, Joni.

Joni Konstantelos

Thank you, good morning, and welcome to Broadwind Energy's Fourth Quarter and Full Year 2012 Earnings Conference Call. With me today are Broadwind's President and CEO, Peter Duprey; and Broadwind's Executive Vice President and CFO, Stephanie Kushner. This morning's earnings news release is available on our website at bwen.com.

Second slide, please.

Before we begin today, I would like to caution you that this call will include some forward-looking statements regarding our plans and market outlook and also will reference some non-GAAP financial measures. Actual results may differ materially from these forward-looking statements. Please refer to our SEC filings and consider the incorporated risks and uncertainties disclosed there, including our Form 8-K and the attached news release filed with the SEC this morning, and our Form 10-K, which will be filed later today. We assume no obligation to update any forward-looking statements or information.

Having said that, I will turn the call over to our President and CEO, Pete Duprey.

Peter C. Duprey

Thanks, Joni, and thanks to everyone for joining our call. Let's start out on Slide 3.

This morning we reported fourth quarter results. Sticking to our strategy, we successfully navigated through a difficult time with the Production Tax Credit expiration. Even during this time of business uncertainty, we recorded $69 million of new orders, mostly in our Tower business. The adjusted EBITDA for the fourth quarter was $700,000, a $1.6 million improvement compared to the same quarter in 2011. For the year, we achieved our goal of positive EBITDA for every quarter in 2012. Looking at other key financial metrics, our SG&A declined 24% from Q4 2011, and we continue to focus on costs. We made significant progress in paying down our line of credit by $16.6 million, which provides us sufficient capacity on our $20 million borrowing.

Moving to our key markets, we've had a lot of favorable activity in the Wind energy market. PTC was passed early in 2013. We also received the final ruling on the U.S. International Trade Commission case against the importation of Chinese and Vietnamese towers. I'll talk about both of these points in more detail later in the call.

Looking at the oil market, it remained strong for both on- and offshore. This dynamic is helping our Gearing and Weldment business. The natural gas market is soft, however, with the significant pickup in demand in the booming oil markets, we have navigated through the market challenges reasonably well.

Turning to the graphs, they show significant progress that we've made over the last few years. Revenue is up 54% since 2010, even with significant regulatory headwinds. EBITDA has improved almost $15 million since 2010. There's still a lot of work to be done, but we are definitely going in the right direction, both financially and strategically.

Let's move to Slide 4. Our new tower orders, that we won in Q4, have enabled the business to start up shortly after the beginning of the year. Having lower but reasonable capacity in both Manitowoc and Abilene plants, we are ramping up to a greater output in February as deliveries of steel and other components are received, associated with some of these recent quarters.

The Services business saw strong order volume and have won some industrial work around gearboxes and drivetrains.

The Gearing business saw low order intake in Q4. This is in part due to the material lead times -- that material lead times are decreasing, thus, some customers postpone the orders until they have greater visibility on their own demand in the new year. Order demand has picked up for the first part of 2013, however, our market intelligence indicates 2013 will be a flat demand year for the U.S., in our key gearing market.

Subsequent to year end, we received a $27 million of additional orders in our Wind Tower business. Recording [ph] volume remain strong and both tower plants should be running at good capacity levels for the rest of 2013.

The graph on the right represents our backlog. We started to show these 2 ways 3 quarters ago. The one on top shows the traditional way backlog has been recorded, which includes a multiyear frame agreement. The red line below is more indicative of the near-term demand and reflects only orders being delivered in the next 6 months. The expiration of the PTC was one of the reasons that orders were falling in the back half of 2012. In the fourth quarter, we took in $51 million of tower orders. And as I had mentioned before, we took in $27 million of orders in the first part of 2013. From the level of activity, I would expect further tower orders in Q1 and into Q2, which could completely fill our tower capacity for 2013 without adding additional shifts.

Let's move to Slide 5. And I've just completed my second year since joining Broadwind. As part of the transformation, over the last 2 years we focused on reducing our footprint and cost structure, establishing a better revenue mix between our Wind Energy business and our Industrial business, as well as reducing customer concentration, and improving our financial performance and flexibility. During this time, our EBITDA margins have expanded nearly 10 points. This has been accomplished by cost reductions, pricing and operational improvements. Our SG&A, as a percentage of revenue, has been reduced by 10 points through better cost management procedures, closing unnecessary offices and realigning our organization structure. To date, we have lowered our annual office cost by approximately $850,000.

One metric we haven't talked about in the past is our safety performance and environmental health and safety of our EHS program. Since I joined Broadwind, we have launched a company-wide effort to measure and identify hazards in the workplace. We have 18 different metrics around safety and environmental compliance. Recordable injuries were down 24% for 2012, and 54% since 2010. I strongly believe we owe it to our employees that they go home every day in the same condition they arrived. This program is about ensuring a safe environment and regulatory compliance. However, this improvement will begin to start to translate into lower workman's comp -- compensation expense, likely to be seen in 2014.

Finally, we've made good progress in reducing our dependence on installations of new wind energy products. As the graph shows, in 2010, new installation of the wind turbine products represented 76% of our revenue. By 2012, new wind installations accounted for 62%. And by the end of 2013, new wind installations should approach 50% of our revenue. This level, we are comfortable with going forward. Our Gearing business has diversified, whereby industrial customers represent 95% of our revenue, and only replacement gearing is being sold in the Wind market.

Transformations takes time. In 2 years we've made a lot of progress, and the financial metrics are heading in the right direction. We have grown the top line significantly, improved the EBITDA-generating ability of the business and we're on a strong path to profitability. We expect to see similar improvement in 2013 that we saw in 2012, as more of our initiatives flow through the financials. Again, there's still a lot to do but I'm pleased with the results to date.

Slide 6, please.

We continue to make good progress in reducing our manufacturing footprint. We relocated our corporate office to Cicero, Illinois in the fourth quarter, which should save the company about $250,000 a year. At the end of 2012, we are a little more than halfway to our footprint production goal. In our 10-K, there's a subsequent event note that we have entered into an agreement to sell our Brandon, South Dakota towers plant for approximately $12 million. In the agreement -- or the agreement is still subject to additional approvals. The buyer is a competitor, however, we believe there is room in the market for additional capacity, particularly as we look at 2014, and achieving the highest and best-use price for the facility within the best interest of our shareholders. This will be a further 150,000 square foot reduction and save the company approximately $700,000 annually. The closure of the Cicero gearing plant is the most complex and expensive part of our restructuring initiative, and we are well on our way, with the completion expected next year.

Slide 7, please.

As most investors know, the PTC was passed in the first part of the year. As many wind developers scaled back their development efforts in anticipation of the PTC expiration, the passage is likely to have little impact on the amount of completed installations in 2013. The industry focus for the balance of the year will be to complete late-stage projects and to advance other projects far enough to start making commitments on turbine purchases and completing building permits. The PTC passage will have the greatest impact on 2014 and '15, depending on how the final language is worked out with the U.S. Treasury and the IRS. We do expect to have greater demand in 2014, and some projects could continue with tower deliveries into 2015 and perhaps 2016. The revised language in the PTC passage was a significant benefit and provides a longer run rate to negotiate a long-term agreement with Congress.

Slide 8, please.

As we indicated in the past, the supply and demand of wind towers has come into better balance. There's been significant changes in the supply, and with some facilities being re-purposed to railcars, other welding fabrication work and transmission towers, this greatly reduces the overcapacity and it should enable the industry to generate a reasonable return on capital. On January 18, 2013, the U.S. International Trade Commission will bear weight on the wind tower trade case. This ruling will further bring supply and demand into better balance. Following at 70% capacity reduction, with a subsequent renewal of the PTC, we don't expect the industry to stand still. We see some examples of suppliers considering expansion in what now looks to be a tight tower market, and may see some new foreign imports. However, we believe that others, like us, have learned from the past and the extreme overcapacity situation will not occur.

Turning to Slide 9.

As we look at 2013, we remain focused on the same strategic priorities that are core to our transformation. However, the emphasis is changing. Our 3 focus areas for 2013 are: continued customer and industry diversification, margin expansion through operational improvements and higher value product enhancements, and improved customer satisfaction. Many of the tools we will deploy in one area will impact other areas.

Let's talk about some of the specifics.

First is customer and industry diversification. The next big step is to start to bundle our drivetrain, welding and gearing expertise into higher-value products. We are starting to see some of the results in this area. We are expanding our engineering resources and have appointed a new product management function that will work with the businesses on a product tollgate process to ensure that we are meeting customers' needs. The graph indicates, by the end of 2014, we expect only 50% of our sales to come from new turbine demand.

On the margin expansion side, a lot of low-hanging fruit has been picked, and we've made good progress. We continue to complete the restructuring programs, shut idle and underutilized assets. Between the completion of our gearing facilities, consolidation and the sale of the Brandon site, these actions will have significant contribution to reducing our cost structure. Last quarter, I discussed our efforts in developing our continuous improvement program. We have started 9 high-value projects to improve throughput, reduce waste in our manufacturing facilities or improve cycle times. We are making an investment of approximately $600,000 in additional people and resources to help train, coach and analyze, and drive financial and operational results in each of the projects. This effort, still in the early stages, but I'm convinced it will -- and it's a way to improve our customer satisfaction and improve our financial performance.

Related to continuous improvement program is an initiative to better utilize our systems infrastructure. We are refocusing our efforts to capture data at a more granular level in order to better understand our process capability. This will allow us to make data-driven decisions on the areas to improve our processes and is the foundation of our CI program.

The last area of focus is on customer satisfaction. For us to grow and retain customers, they need to be satisfied with our performance. We need to improve customer satisfaction by improving our on-time delivery rates and in enhancing the value our products bring to our customers. Many of the continuous improvement initiatives will help us identify bottlenecks and eliminate process breakdowns to improve on-time deliveries. We need to work more closely with our customers to jointly engineer solutions for their product needs. Customers can leverage our gear, welding and in-field service experience across many industries such as oil, mining, steel and wind market applications. This, too, is why we've developed new product management function to develop new products into a more holistic offering. To me, we are now getting to the final stop in the business transformation.

I'll now turn the call over to Stephanie to discuss the financials in more detail.

Stephanie K. Kushner

Thank you, Pete, and good morning.

Turning to the next slide, the abbreviated income statements.

Due to do the relatively lower production volumes, primarily in our Towers business, we recorded a $200,000 gross profit on $44.9 million of sales, including $576,000 in restructuring costs. The fourth quarter gross margin, excluding restructuring, was 1.8%, unchanged from last year. This is lower than we had projected, due to incurring some penalties on late tower deliveries, and due to higher benefit expense and staffing inefficiencies at our tower plants during the uncertain production weeks leading up to year end. For the full year, our gross margin was 4%, excluding restructuring, which fell short of our 5% goal for the year. As Pete stated, raising gross margins is a priority and we expect to gain some meaningful traction in 2013 as we benefit from restructuring savings in Gearing and Services, and stable pricing and a smoother production flow in Towers.

Control of our operating expenses continues to see a bright spot. We spent $5.9 million in Q4, in line with the $24 million run rate outlook. This included $259,000 of restructuring. For the year, operating expense, excluding restructuring, was reduced to 11.1% of sales. Our operating loss of $5.7 million was slightly better than the prior year, but included significantly higher noncash and restructuring costs. Therefore, our adjusted EBITDA, which excludes these items, rose by $1.6 million. We're not taxed affecting our losses, and through year end, had generated a $154 million tax loss carryforward. I'll comment later on our NOL preservation plan which we implemented earlier this month and which we are bringing to our share holders for approval at our annual meeting in May.

Moving to Slide 11.

Towers and Weldments recorded revenue of $25.6 million in the quarter, down 25% -- 26% from 2011. As shown in the bottom right-hand table, we produced a handful of fabrication-only towers in the quarter. These were immaterial in the context of the full year. Our Industrial Weldments revenue rose to $3.6 million in the quarter and totaled $10.6 million for the full year. So we're making great progress with this diversification effort. Our operating results for this segment were weaker than expected, as we expected -- experienced difficulties with managing our staffing in the back half of the quarter, due to unavoidable production schedule and volatility going into the PTC expiration, and because we incurred some late delivery penalties with one customer. Moving into 2013, we believe our production flow, beginning in the middle of Q1, should be more consistent, our revenues should be up about 5% and our EBITDA margins stronger than 2012, back into the low double-digits.

Let's moved to the next slide.

Our Gearing business had sales of $14.3 million in the quarter, down from the prior year due to lower deliveries to one of our industrial customers, for gearing used for natural gas frac-ing equipment and the absence of sales of gearing for new wind turbines, for deliveries against a low-margin multi-year contract ended earlier in 2012. As we've commented during the past 2 quarters, we no longer have any gearing sales going in to new wind turbines, which accomplishes another key diversification objective. We continued to make process -- progress with our plant consolidation, and have begun the time-consuming and capital-intensive process of transferring the large gear machinery from the plant which is being vacated.

During the quarter, we incurred $547,000 of restructuring expense and spent $1.4 million of capital in support of this project. As you will recall, $3.5 million of an estimated $6 million annual restructuring cost savings is projected for this segment. In 2013, we will begin to experience the first tranche of the savings at Brad Foote, just under $1 million for the year.

Our EBITDA margin of 7.1% was below the full year run rate, but still sharply higher than 2011. The $600,000 improvement in EBITDA reflects the higher margin mix of sales and lower bad debt expense, which more than offset the adverse impact of lower production. Our operating loss of $2.2 million continues to reflect the very high depreciation and amortization we are recording in this segment, $2.6 million in this quarter or about 18% of sales at the current run rate. Earlier in 2012, we began to accelerate the amortization of a portion of our customer intangibles, which has added an additional $450,000 in noncash charges per quarter until June of 2013. In connection with the purchase of the Bradford gearing business in 2007, the assets were revalued and depreciated over 7 years. As a result, we expect the annual depreciation to decline by about 50%, or $4.2 million, by the beginning of the year 2015. Looking at 2013, we expect this business to experience a modest amount of top line growth, and for EBITDA margins to average about the same, as the business transitions through the most disruptive portion of the consolidation activities.

On Slide 13, the Services business had sales of $6.1 million, up 11% from the 2011 fourth quarter. Adjusted EBITDA was essentially breakeven, a significant improvement from the $1.1 million loss a year earlier. The improvement in adjusted EBITDA reflects both cost reductions, notably the reduction of the Abilene leased space, and productivity improvement. Improvement in the operating loss was less significant due to $120,000 of restructuring costs and $271,000 of higher depreciation due to completion of the investment in the drivetrain service center. In 2013, we are projecting double-digit top line growth for this business, as we gain traction with new product offerings which improve turbine performance, and as we improve the capacity utilization in our drivetrain service center. EBITDA margins should be modestly positive for the year, as is typical, with the strongest performance in the middle 2 quarters of the year when the weather is most conducive to turbine repair project.

Slide 15, please.

As we predicted, our operating working capital returned to a more normal level during the fourth quarter, and dropped by $18 million to $22 million at year end. This dramatic working capital recovery drove a significant source of operating cash flow and brings our working capital level back to 12% of trailing 3-month annualized sales. This freed up our credit line with AloStar, where the year end's drawn balance drops below $1 million. Looking into 2013, we expect working capital to range between 12% and 15% of sales, and our credit line to be sufficient to support our liquidity needs. The sale of Brandon, which should net more than $8 million after repayment of the underlying debt, will provide an additional cushion.

Moving to the next slide.

As a result of reversal the in working capital, we reduced our net debt to $10.1 million at year end, down sharply from the third quarter. Our total debt, excluding grants, dropped to $8 million and included the $3.9 million balance on the mortgage on the Brandon, South Dakota tower plant, which will be repaid with a portion of the proceeds from the sale of the property, expected to close before midyear.

I've commented before, about this $2.9 million balance of grants and forgivable loans, which have little associated interest expense.

Our cash balance declined to less than $1 million during the quarter, under the new AloStar line, we will retain minimal levels of cash since our customer receipts will be routinely applied to repay the credit line. Assuming successful closure of the Brandon tower plant sale, we would expect to have low utilization of our credit line in the second half of the year.

Slide 16, please.

In 2013, we expect to demonstrate further progress with our financial results, although our first quarter has naturally started off weaker due to the stop/start effect of the PTC expiration on our Towers business. First quarter revenue should be in the $47 million to $48 million range, as the timing of new tower orders and steel deliveries impacted us significantly in January and early February. Adjusted EBITDA should be in the range of $1 million.

As Pete indicated, our production levels had stabilized by the middle of Q1 and we expect to run our tower plants at a relatively high loading level, and produce nearly 350 towers this year, with about the same section count as 2012. Importantly, we are facing longer runs with less tower variability, so this business should perform well in 2013. The assumptions going into our 2013 outlook include: the improved visibility and operational improvements at Towers, stable demand and margins in gearing with initial restructuring benefits contributing later in the year, and revenue growth and margin expansion in Services.

For Broadwind in total, we're projecting top line growth in the low single-digits, with adjusted EBITDA nearly double the 2012 level. The margin expansion will come from the volume growth and margin recovery in Towers, about $1.5 million of incremental benefit from restructuring activity, and the elimination of EBITDA losses in Services. And with the runoff of amortization, lower restructuring expense, and reduced interest expense due to less utilization of our line, our EPS loss should drop from $1.27 in 2012 to $0.55 to $0.75 in 2013.

Turning to the final slide. I wanted to comment on 2 other recent developments. As you know, we have been dealing with securities litigation initiated more than 2 years ago. I'm pleased to comment that a mediated agreement was reached this quarter, to settle the suit for $3.9 million, a settlement which will be paid by our D&O insurers. Without commenting on the merits of the case, I can say we are happy to have this detraction behind us.

Secondly, earlier this month, our Board approved a shareholder rights plan that is designed to preserve the $154 million of net operating loss tax assets we have accrued through the end of 2012. Under Section 382 of the Tax Code, there is a provision that says, in short, that if we are deemed to have experienced a greater than 50% change in share ownership by significant shareholders, we could stand to lose up to 80% of these tax benefits. Therefore, we have put in place a rights plan that is designed similarly to a typical poison pill, but with some important differences. It is in place for the express purpose of preserving tax assets for our future use, by limiting an inadvertent ownership change triggering a limitation to the annual usage of NOLs once we turn profitable. We think preserving the benefits is important for the company and our shareholders, and we are asking our shareholders to approve the plan at our Annual Meeting in May.

With this, I'll turn the call over to Pete to move to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sanjay Shrestha from Lazard Capital Markets.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

I wanted to talk about the Slide 8, which you have here. So when we think about the industry expectations for 2013, the range of shipments is anywhere between 3 and 4 gigawatts. When I look at Slide 8, and if we start with the assumption that the industry capacity was 10 gigawatts in towers, and we take away the import, it looks like the total industrial capacity is going from 10 gigawatts to 5 gigawatts for 2013. And so that with you guys having 1.2 gigawatts of total capacity it's, as you commented, it's a pretty tight market, but what's happening in terms of the discussions you're having with your customers in terms of pricing, terms and what kind of changes are you seeing because of the tight market?

Peter C. Duprey

I think the market is still fairly dynamic. Yes, we've had, as this slide portrays, we've had some fairly significant reductions in capacity. I think the biggest was obviously the Chinese, because I think they represented a big chunk of the market, and I think somewhat disrupted pricing. You've got a number of dynamics that Trinity could re-purpose, depending on what happens with -- really, 2014, Trinity could re-purpose some of their facilities back to towers. So I think they will toggle back and forth between railcars and other items, as well as towers. We've also got a dynamic, that Vestas, who is the second or third largest wind player in the world, has the facility out in Pueblo, Colorado, they now are starting to do towers for third parties, not only for their own consumption. So I think there's a bit of a wildcard there. So I think we're very comfortable with where our facilities are, in Manitowoc, in Abilene. It seems to be where the hotspots are and so I think we're in the right places, and we'll see how everything else kind of transpires over -- I would say, the next 6 months, we'll have a better picture as to what 2014 is going to look like.

Sanjay Shrestha - Lazard Capital Markets LLC, Research Division

Okay. And my second question was on the Services business. Could you just sort of talk about -- what are some of the trends you are seeing in the Wind market and the potential outlook to get large multiyear service agreements in Wind? And then interesting to see the backlog here, with the large industrial powertrain order. Maybe help us understand the significance of this order and what are the type of customers you're pursuing here.

Peter C. Duprey

Sanjay, with respect to O&M, we kind of said we're not going to chase that market. We felt that pricing was a bit of a race to the bottom, and where we focus is in what I call non-routine maintenance. So a gearbox breaks or a blade needs to be repaired, so it is large repair services that are time sensitive, where we can deploy teams to go fix it. The other area that we're developing is upgrades to turbines or improvements to the turbines, and more value-added services rather than kind of going with the flock and going after O&M. We made that decision about 2 years ago as we saw that to be very competitive. And then what we want to do is diversify that business a little bit by being able to do other industrial work. So we picked up some gearbox work in Abilene. It starts to provide a base load of revenue and cover some fixed costs. And so, again, just like every one of our businesses, we want to see a mix of industrial work and wind energy work.

Operator

[Operator Instructions] Your next question comes from the line of Mark Spiegel with Stanphyl Capital.

Mark B. Spiegel - Stanphyl Capital Management

Yes. You're making nice progress here. Also, the South Dakota sale is terrific because with $8 million net, I guess that brings your net debt down to something that's negligible. I mean, pro forma like $2 million based on 12/31, right?

Stephanie K. Kushner

That's right. Our working capital will go up because our revenue is growing, but it does provide a very important additional liquidity cushion.

Mark B. Spiegel - Stanphyl Capital Management

Yes. No, that's terrific. So my first question is -- I think on the last call you said you expected to have $4 million to $5 million more of sort of incremental annual cost reductions that would take place by later this year. Now, Stephanie, you mentioned. I think $1.5 million incremental benefit in Gearing this year. So I guess my question is -- I mean, the bottom line question is how much of these reductions are built into that $9 million to $12 million of EBITDA guidance? And if you had all these reductions done today rather than by the end of the year, how much better would that number be? Does that question make sense?

Stephanie K. Kushner

Yes. So what we talked about, in terms of our restructuring objective, was a $5.5 million to $6 million a year savings. We got a little bit of that in 2012, because of closing our European office, for example. That was probably the only material -- we got a little bit of impact on the Abilene lease. But net, in 2012, we got maybe $600,000, $700,000 of that. In 2013, we'll get some of the initial benefit of Gears. I mentioned a number of a little less than $1 million. We'll get some of the savings on the corporate office. We'll get the annualized benefit of the Abilene sale, and assuming the Brandon transaction closes, we'll get several hundred thousand dollars from that. So net, in 2013, we'll get somewhere around $2.5 million. It's an incremental $1.8 million or so. The biggest savings is when we get the gearing plant consolidation complete. When we get the most efficiencies there, in terms of the line of sight in our production processes, and that consolidation, we're actively involved in that right now. It slowed down a little bit from last year, in the quarters when our liquidity was tight because of the tower production. But, basically, $2.5 million of it is going to be with us by the end of 2013, and we're still looking at a $6 million in total. So the balance should come through in 2014.

Mark B. Spiegel - Stanphyl Capital Management

So because there's these moving parts here -- and I'm trying to put in my head a snapshot of what this company looks like once those reductions are done. I mean, would it be fair to say that if those reductions were done, you can snap your fingers and they're done today, that you be guiding for $5 million of additional EBITDA over this $9 million to $12 million number?

Stephanie K. Kushner

Well, the $9 million to $12 million has about $2.5 million in it. So it's the other $3.5 million you'd be adding on top of that.

Mark B. Spiegel - Stanphyl Capital Management

Okay. So sort of on a pro forma basis you'd be running at $12.5 million to $15 million in terms of guidance if you can get all this done, like, instantly, is that a fair statement?

Stephanie K. Kushner

Right, that's fair.

Mark B. Spiegel - Stanphyl Capital Management

And then next question. Where would nat gas have to get to for the Gearing business to pick up again, in terms of gas customers, in terms of nat gas pricing?

Peter C. Duprey

I think what we hear from the industry is around $5, 1 million BTU plus or minus $0.50.

Mark B. Spiegel - Stanphyl Capital Management

So other than that, it's just going to stay where it is? I mean, even if it's $4, it's not going to help much, you're saying?

Peter C. Duprey

Well, yes. But we are trying to shift into other industries. So nat gas is down, but oil exploration is up. We are winning some businesses with some of the offshore players. So we're kind of following the shift like everybody else. There's a boom in natural gas. That kind of declined. And then there was a big shift towards oil, and we're following that along. And as long as oil stays where it is, there's an inordinate amount of activity right now.

Mark B. Spiegel - Stanphyl Capital Management

Terrific. Where is CapEx going to be this year?

Stephanie K. Kushner

It should be about $6 million this year. $2 million of it is the restructuring at Brad Foote and the balance is distributed across our businesses.

Mark B. Spiegel - Stanphyl Capital Management

So would it be fair to say that, let's call it maintenance CapEx for the company, is around $4 million?

Stephanie K. Kushner

That's correct. And that's pretty normal for us, manufacturing businesses, to be spending maybe 2% per annum of your revenue on capital. And that's part of the reason why our financials are somewhat distorted because our depreciation charge, instead of being at a normal investment run rate of 2% or so, is closer to 7%.

Mark B. Spiegel - Stanphyl Capital Management

Right, right. Yes, and I'm aware of that. But you said that seems to run off by the end of 2014, and then you get sort of a more real picture. Is that a fair statement?

Stephanie K. Kushner

Yes. Yes, it does. It starts to be much more representative of kind of a normalcy for our business.

Mark B. Spiegel - Stanphyl Capital Management

I also thought it was interesting that you said that the PTC extension is not going to affect you much this year, which means it's going to be a good Tower business even without that. So that's pretty interesting. Well, I guess this leads me to, really, a final question for maybe Pete. What are you hearing in terms of the chances, or is it too early to tell, that the industry getting a sort of 5 more year gradual phaseout extension? Are you hearing anything about that?

Peter C. Duprey

Yes, I think it's a little too early to tell. The American Wind Energy Association, I think, will -- is really following what's going on. If there's a tax extender bill or an energy bill, they're going to try to work with the Congress to get a longer-term extension, and with perhaps some sort of ramp down of the PTC to try to keep everybody happy. But I think Congress seems to be diverted to other issues right now.

Operator

And I would now like to turn the call over to Pete Duprey, CEO for closing remarks.

Peter C. Duprey

Yes, let me just recap 2012, because I think we've made significant improvement in the business, a $7.6 million increase in our EBITDA compared to Q3. We paid down our line of credit by $16.6 million. We certainly have a much better outlook in the Wind industry and see that we can have a runway of 2 to 3 years of activity looking forward. As we mentioned, we reduced our square footage by 260,000 square feet and that's not including Brandon. Our Services business generated positive EBITDA in the second half of the year. As Stephanie mentioned, we settled the Brasher shareholder suit, which is $3.9 million and covered by insurance. And that really removes a cloud over the company. That's been there about 2 years. The sale of the Brandon facility will lower our expenses and significantly improve our liquidity. And as we talked about on the call, the order book is filling up as a result of us averting the PTC cliff. So like I said during the call, we've still got a lot of work ahead of us, but I think we had a very good year, I think we're looking at a very good year in 2013. Thanks a lot for joining the call and I look forward to discussing the first quarter in a few months. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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