Broadwind Energy Inc. (NASDAQ:BWEN)
Q1 2016 Results Earnings Conference Call
April 28, 2016, 11:00 am ET
Joni Konstantelos - Director of Investor Relations
Stephanie Kushner - Interim President and Chief Executive Officer and Chief Financial Officer, Director
Mark Spiegel - Stanphyl Capital
Good morning and welcome to the Broadwind Energy first quarter 2016 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would now like to turn the conference over to Joni Konstantelos, Director of Investor Relations. Please go ahead.
Thank you. Good morning and welcome to Broadwind Energy's first quarter 2016 earnings conference call. With me today are Broadwind's Interim President and CEO and Executive Vice President and CFO, Stephanie Kushner and Broadwind's Vice President and Corporate Controller, Bob Rogowski. This morning's earnings news release is available on our website at bwen.com.
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-Q 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 Stephanie Kushner.
Thanks Joni and good morning. Starting with highlights. Our recovery of the first quarter was encouraging. We booked $39 million in new orders, up about 80% from a year ago. We stabilized our production and invoiced 119 towers, up from 93 in the fourth quarter of 2015. Our gross profit margin recovered to8.5%, up sharply from Q4 and nearly 34 percentage points higher than the first quarter of 2015. We narrowed our operating loss to $200,000 and generated $1.7 million of EBITDA. And our free cash flow was strong at $3 million, which boosted our cash balances to more than $15 million with our credit line still untapped.
Next slide. I spoke in February about three near-term priorities. First was the double order intake following a year when we were effectively producing against a surge in orders taken in 2013. We made some progress in Q1 but are still facing some market weakness in our gearing and weldment businesses. So I will cover some of those market comments later.
Second, I am very pleased with the progress that our tower business has made in terms of improving production consistency. In Abilene, weekly production has been very consistent for the past three months despite some, what I would consider, normal operating challenges, including supplier quality problems, challenging weather patterns and minor equipment failures. The team has demonstrated much improved ability to anticipate, deal with and recover from these types of issues. Our production is slightly ahead of schedule and our quality is consistent and strong.
Now, one quarter is not enough time to declare success but it is an important data point. We had a comprehensive audit of our production systems and processes earlier this year and we continue to make changes and improve our systems to make our plant consistently successful. I think we have made significant progress in terms of making our production processes more robust and this will continue to be an area of focus.
We also made some great progress on cost reduction. I committed to an $8 million full-year reduction in plant fixed costs and operating expenses and we achieved $2 million of that in the first quarter. Key elements of the savings included lower indirect labor, reduced supplies consumption, lower depreciation and reduced SG&A employee costs, among other smaller items. We continue to work to drive down expenses in our core contract manufacturing businesses, while investing carefully to nurture growth in some newer product lines.
And now our turning to a market update. There haven't been a lot of changes in our market since our February call. But just to summarize, the wind energy business remains robust, the near-term outlook is for annual U.S. installations in the eight to 11 gigawatt range between now and 2019. For us, that translates into a market of about 4,000 to 5,500 towers a year. Industrial customers continue to represent significant demand for wind energy, either contracting directly with wind farm operators or working through utilities and the political environment remains supportive. There was an interesting bipartisan Senate bill passed just this week, for example, supporting wind industry R&D.
The U.S. gearing market outside of automotive has been in contraction since 2014 and 2016 is bringing no relief. Orders for coarse pitched and beveled gears, which is where we concentrated, are expected to remain down this year with no real positive momentum until 2017 at the earliest. We are not seeing any recovery in oil and gas or mining demand. Although we have seen some additional orders for crushing equipment used in construction.
Aftermarket demand for wind gearing remains a bright spot. We completed the qualification process with two wind gearbox manufacturers during this quarter and a third is in the early stage. There as an interesting announcement the other day that showcased a wind farm operator who has formally changed their wind turbine asset lives to 30 years. This is simply an accounting recognition of the reality that what used to be considered a 20 year asset actually generates income for 30 years or more. This is positive in terms of the need to rebuild gearboxes, so it should expand the market for replacement gearing.
Compressed natural gas or CNG is a new market for us. This is a market we decided to enter about 18 months ago and is a young market in the U.S. We have partnered with an Italian company, SAFE, who makes CNG compressors and we are configuring compression and storage units for CNG station. We shipped our first CNG unit during this first quarter. Unfortunately, as it happened, we have entered the market at a challenging time where the cost spread between diesel and CNG fuel is tight. But we this as a long-term play and we expect to gain traction over time.
Next slide. I wanted to briefly revisit the restructuring program we kicked off four years ago and note the latest progress. At that time, we had 1.5 million square feet of space in 14 locations to support $186 million of revenue. Over an extended period of time, we have brought that footprint into much better alignment with our business needs and we are operating in less than 900,000 square feet today supporting about the same revenue. We have seen rent and overhead reductions and some sale proceeds as we have made progress. Early in April, we completed the sale of the 60,000 square feet Clintonville, Wisconsin plant for proceeds of just over $0.5 million. Although restructuring is never completely finished, I think this completes one of the few remaining milestone for that initiative.
Next slide. Our tower orders totaled $35 million for the quarter and although this slide shows a book to bill ratio that is less than one, actually in terms of units sold we were essentially flat with our sale, the difference being the steel price. Each tower contains up to 300,000 pounds of steel and the recent steel prices we are seeing sharply lowered material content.
For gearing orders, we are at disappointing $3 .5 million in the quarter, up slightly from Q4, but about 74% of sales. Last year, we had an annual buy for a large wind customer in the first quarter, about $4 million and these tend to be lumpy, which makes the year-over-year comparison more difficult. We booked almost no orders with oil and gas customers during the first quarter of 2016. Our large customers in this segment are still working off component backlog. In total, Broadwind's ending backlog was $86 million and we are still negotiating to go open tower production slots late in the year and into 2017.
Turning to liquidity. Liquidity strengthened significantly in the quarter. As you can see in the left-hand chart, inventory, which was nearly $45 million a year ago, was just over $20 million at the end of the first quarter. On a net basis, this equates to an impressive 9.4 inventory turns. Consequently, our March 31 operating working capital was down to $7.8 million or about 4% of annualized sales, well below our normal band. We expect to trend up during the next quarter and return to the 8% range in the back half of the year.
Our outstanding debt was $5.2 million at quarter end, half of which was the new markets tax credit financing, which should mature and be forgiven in about two years time. And our cash balance was strong at over $15 million.
Next slide. I think we have covered most of these numbers. As I mentioned, our gross margin recovered to 8.5% and our operating expenses declined to $4.2 million. We incurred operating loss of $200,000, better than guidance, mainly because of the improved labor productivity at our Abilene tower plant. Adjusted EBITDA was $1.7 million. Our net loss from continuing operations was $400,000 or $0.02 a share. Discontinued operations in 2015, of course included the operating loss associated with our services business, which we exited in December of 2015.
Next slide. Towers had a nice recovery this quarter selling 119 towers and the segment reported revenue of $42 million versus Q1 of 2015. Lower steel prices subtracted about $4 million of revenue. Our operating income recovered $3.2 million or 7.7% of sales, including the carryover impact from the end of the Abilene production run that challenged us so significantly during most of 2015. Our near term objectives include selling out the balance of our production capacity for this year and into next and continuing to work on production efficiencies to lower our cost.
We are currently launching a new tower model in Manitowoc and I am pleased to say that our new APQP or new product launch process is working as it was intended. We spent considerable time upfront locking down customer specifications and building a disciplined plan to recover from problems as they occur. While the launch has not been without a few hiccups, on balance the team is more confident of their processes today and this positions us well for future business.
Second quarter revenue for towers should be in the range of $35 million to $37 million with operating income of about $2.5 million. The reduced income outlook reflects lower production and a less favorable sales mix. Lastly, I mentioned that the Board approved earlier this week the second phase of our paint system investment $1.4 million, which will be used to improve the paint facilities and dispensing systems at both tower plants.
Gearing results were in line with our expectations. For the first quarter, on revenue of $4.8 million, we incurred an operating loss of $1.2 million and negative EBITDA of $500,000. I think we have now completed our efforts to resize the workforce in gearing so that we can operate in an EBITDA neutral way at a $5 million quarterly revenue run rate. As you can see in the bottom left-hand graph, data from the American Gear Manufacturers Association shows that orders for the large or coarse pitched gears that comprise about three quarters of our sales mix have dropped precipitously with the collapse of oil and gas prices in late 2014. We have pared back our workforce in overhead to the extent we can without impairing our ability to rebuild as markets recover. For the second quarter, we expect slightly higher sales, about $5.5 million and near breakeven EBITDA.
In summary then, it has been quarter of recovery for Broadwind and we are on a much improved operational and financial footing. Our tower business has stabilized and we are investing capital to support further operational and financial improvements. Our gearing business has made the necessary reductions to hunker down in difficult markets. We are delivering on our $8 million annual cost reduction target and our balance sheet remains strong. With slightly lower tower production due to the model changeover, we are projecting Q2 revenue of $42 million to $44 million and a comparable small operating loss, consistent with the first quarter.
I should also mention that our shareholders voted this week to support our Board and proxy initiatives. Importantly, the shareholder rights plan extension was approved, which will preserve our more than $200 million of potentially valuable NOL.
And this completes my prepared remarks. So I will open the call up to questions.
[Operator Instructions]. Our first question comes from Mark Spiegel with Stanphyl Capital. Please go ahead.
Hi Stephanie. It's great to see you get things back on track there. So congratulations on that.
Really just two questions, because you covered some of the things I was going to ask you about in your comments. You said Q2 tower operating income and I guess presumably EBITDA is going to be a little lower than Q1 due to different mix of towers. What should we think about, the Q1 number annualized was out to around $17 million of EBITDA for that division. Is that sort of what we should think about going forward? Because obviously the Q2 number annualized is going to annualize out to somewhat less than that?
Yes. I think it's a little too early for me to comment on that because we are still testing the consistency of our production and we are working on cost reduction initiatives and managing down expenses. So I would like to see us be stronger in the second half of the year but I think I would just reserve committing to that for now, Mark. But please stay tuned.
So is Q2 the fluke in terms of product mix? Or was Q1 unusually good in terms of product mix? Because you just sort of commented on the, I think sort of more maybe more on the expense side, which is fine, but on terms of the revenue side, which is more typical, Q1 or Q2?
Well, I would say for this year Q2 is going to be more typical.
Okay. Fair enough. And then last question, you are targeting corporate expense at around $7 million, I think, when we last spoke. And if you annualize the Q1 number, it comes out to around $9 million. Any comment on that? Was Q1 unusually high? Or were you really running around $9 million a year?
No. It will come down beyond Q1. There is really a couple of things. One is that Q1, frankly in terms of accounting is always higher because of audit and year-end costs and so on and the fact that those did run a little higher than we expected. So we are working to try and then compensate for that. And then probably more significantly, we managed the health and workers' compensation insurance essentially in corporate and then we absorbed any increases or decreases up to a point versus what we allocate out to our business unit. So we get some variability that can happen in any given quarter. But again, I think that will reverse out in subsequent quarters. So we should be back down to the $1.6 million, $1.7 million range, for example, in Q2 and beyond.
Okay. Great. So that's $7 million a year or maybe even slightly less, which is what you were looking for. Okay. Terrific. Thank you very much. And please keep up the good momentum there. Thank you.
[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Kushner for any closing remarks.
Thank you very much. Thank you for your interest and we look forward to speaking to you again next quarter. Bye, bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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