Broadwind, Inc. (BWEN) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Broadwind Energy Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. John Segvich, Director of Investor Communication. Please proceed, sir.

Thank you. Good morning, and welcome to Broadwind Energy's first quarter 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 we'll 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 our President and CEO, Peter Duprey.

Thanks, John. Good morning, everyone. I'm going to start on Slide 3. This morning, we have reported a 25% increase in revenue. Gearing was up 18%. It was primarily driven by Oil & Gas, mining and off-highway vehicles. Services was up 88%, driven primarily by our field service team and additional blade work. Towers was up 25%, but this was driven by a greater percentage of the Towers with steel content versus that only. This is something we talked about at the last conference call and Stephanie will go into more detail later on in her presentation. Adjusted EBITDA was sharply up from $200,000 in Q1 2011 to $1.4 million in Q1 2012. Gearing was really the shining star of the group. Orders were up 12%. Revenue was up 18%. EBITDA as a percentage of revenue was 11% compared to 1% a year ago. 75% of our revenue was from the industrial side of the Gearing business. So as we talked about previously, Gearing has really made its transition from being almost 100% wind energy gear company to now a better balance between wind and industrial. I think they've made that transition well, and I think this quarter proves it. Turning over to Towers and Weldments. Tower orders, we anticipated fairly low tower order intake for the quarter, really primarily as a result of the $50 million order we took in Q4. On the other side, orders in our specialty Weldment business was $2.1 million compared to $1.1 million in Q1 2011. Revenue was $1.8 million in Q1 2012. So you can see that the Weldment business, and we've talked about this, is growing nicely. I'll also remind people that the margins on weldments is almost twice what they are in Tower. So it doesn't take too much additional incremental…

Thanks, Pete, and good morning. Let's turn to Slide 8. So it seems that our first quarter results demonstrated good progress on the past profitability. Turning to the consolidated income statement, we posted a gross profit of $2.2 million for the quarter or a 4.8% gross margin excluding restructuring expenses. This is up from last year's full year rate, reflecting the progress at Gearing. The gross margin was below the 2011 first quarter figure only because of the impact of the high steel content on Towers left versus last year. At last year's Towers, they've been built including steel, we estimate that the gross profit margin would have been comparable. And sequentially versus the fourth quarter of 2011, gross margin was up nearly 3 percentage points. We continue to make progress with producing operating expenses as well. At $6.2 million first quarter expenses, were down $400,000 from last year due to lower salary investment expense and reduced professional expenses. These reductions more than offset $75,000 of restructuring expenses, mainly incurred to close a west coast service office. As a percent of sales, excluding restructuring, operating expenses totaled 11.2%, down both sequentially and year-to-year. We are on track for the $25 million to $26 million full year run rate we projected, which reflects benefits from a portion of restructuring actions already completed, notably the closing of the European office and some other overhead reduction. Our operating loss was $3.9 million, including $500,000 of restructuring expense. The operational improvement is more evident in the adjusted EBITDA of $1.4 million, which did not include non-cash charges or restructuring. The loss per share narrowed to $0.03. We continue to report no income tax credit on the operating line. At the end of last year, we had more than $136 million of tax loss carry…

Thanks, Stephanie. First question.

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

The first question on your Gearing side of the business where industrial segment is really giving you guys a pretty nice growth here. And in the past, you guys have been more sort of focused on the Oil & Gas segment of the market. Is that still the case because it's sort of, countercyclical to your wind business given the low prices, the commodity on the natural gas side? So can you elaborate on that a little bit? What are the areas of strength you made in that business? And what sort of a sustainable growth rate can we think about given we start to looking to 2013 there?

Sanjay, the Gearing market's about a $5.5 billion market. Oil & Gas is actually less than 10% of the overall market. Even our -- so we're into off-highway vehicles, mining, certainly Oil & Gas. But even as you look at Oil & Gas, you've got to look at, is it -- it's just dry gas? Is it liquids? Is it offshore because offshore continues to grow at a fairly rapid rate. So it comes back to something I've talked about before, customer intimacy and understanding where -- who our customer is and where this stuff is going. And certainly we have some exposure to the frac-ing side, but I think we actually have a pretty well balanced portfolio. Mining and off-highway vehicle is growing in similar patterns as Oil & Gas. So I don't think we have this huge concentration in Oil & Gas. It's growing nicely as wind came down, and I'll admit to that, but it's not the only thing outside of wind in our business.

Got it. So given the existing capacity that you guys have in that -- within that segment, right, where you could do obviously one north of a hundred million dollars of revenue. What's your view as to -- I mean, how are you guys sort of thinking about increasing mix on the broader industrial market for that business? And how should we think about that, especially because I'm kind of with -- more interested in really as you think '13 and beyond?

So I think some of the growth will continue in mining as we continue to diversify. There are a number of large mining customers that we haven't penetrated yet that we're in discussions with now. I mentioned briefly in my prepared remarks about industrial gearboxes. We are seeing that come back. We have a long history in making industrial gearboxes for steel, for draw works and bridges and also used in oil rigs, offshore oil rigs. I think that will be a good growth opportunity for us, off-highway vehicles, both the locomotive side and the large crawler cranes and things like that. So as long as the economy stays growing, and I would say that those parts or those components tend to go to India, China on a worldwide basis. So it's not like even though we're -- most of our revenue is generated in the U.S., I think a lot of the parts that we make are going overseas. That's also true in the weldments business. So the forecast for at least some of the mining, the forecast there is for about a 10% growth rate. And I actually think we can do little bit better just because we can win some of that back.

Okay, okay. Great. One final question for them guys. So as we really think about your Service business, right, while the new install on the wind market could actually decline into '13 given all the policy dynamics and everything surrounding it. So how do you sort of think about, I mean, basically or create opportunity, maintenance opportunity because that could actually turn out to be a pretty nice offset for you guys even when you think about potential decline in the Tower business for that market?

Yes. I think we're very bullish on the Services market. Year-over-year, we're looking at good growth rate. We're doing a lot end-of-warranty work. We're doing a lot of blade work. So as the fleet ages, we're in a very good position. I would say on Services, so we're in a non-routine maintenance, so gearbox failures, blade cracking and delamination. And there aren't a lot of players who are going after that niche. There are a lot of players who are going after OEM, but I think we're finding a nice niche in this non-routine maintenance position that particularly as the fleet continues to age, we've got the people who are trained on multiple equipment and we have the safety record. And I think that's why we're winning a lot of this work.

So let me just add one comment. Run rate right now in terms of our construction support business, it's only about 15% of our services. So the majority of our revenue is coming from the installed base. I think probably in the fourth quarter this year, we'll do more construction support just because of the race to get things in before year end. But it's really the other 85% of our business, where we think the growth should continue and even accelerate.

Your next question comes from the line of Christopher Blansett with JPMorgan.

This is Eugenia[ ph] calling in for Chris. My question is around the Tower and Weldments business side. Based on with the results for this quarter, how should we look forward for the '12 in terms of the portion on the weldments? Do we consider this one continuing to grow in a larger portion? How should we model that?

You want to take it first? Sorry Stephanie.

Yes. So I said our Weldments business was about 5% of our revenue this quarter, but because it's got a higher incremental margin, it looks more like 10% of our profitability. And that was at $1.8 million of sales. Our forecast for the year is to be at $10 million this year. So you can see we expect it to increase as the year progresses. And then next year, our target is to be at $20 million of Weldments business. Effectively, we have taken about 20% of our tower capacity today and shifted it to the Weldments business. Does that help?

[Operator Instructions] Your next question comes from the line of Pavel Molchanov with Raymond James.

Just curious, which we're hearing from -- but we or your other industry sources about the PTC and perhaps timing for bringing it up for a vote?

I think the consensus right now particularly with the election is that we think nothing will happen until a lame-duck session, and that seems to be true with a number of other political issues right now. So -- and I think it's unfortunate, but I think that's where we're going to be. I still believe that there's a lot of support for wind energy in this country, both at the local level and at the state level. I think it's 30 governors have supported extending the PTC. So it's unfortunate, but I think that's where we are, lame-duck session is when we'll get it.

And if that in fact materializes and there is a positive result, but in December let's say, how long would that kind of well be in 2013? I mean, how many quarters would the industry still be in kind of recovery mode?

I would say it takes a good 6 to 9 months to ramp back up. But with that being said, we're talking to a number of the OEMs today about what their outlook is and how one might be able to level load, work in cooperation and try to level load production, so that you don't end up with a significant shutdown of some of the key components. We're kind of at the early stages of some of those discussions. I think there'll be more discussions in June at the wind energy show, and I think there is a spirit of cooperation between the supply chain and the OEMs to try to navigate through this.

I would now like to turn the conference back over to Mr. Peter Duprey for closing remarks.

Great. Thanks very much. One thing I'd like to say is that I think we've made a lot of progress in Gearing. I said before, they've kind of turned the corner. Towers is positioned much better from a market penetration and a diversification with our Weldments business. Services is growing nicely and is on a good path towards breakeven for the year. As we continue to execute on the restructuring plan, I really believe that our prospects are bright in the future, both this year and next year and beyond. Thanks for the interest in Broadwind and thanks for participating.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.