Greetings, and welcome to Broadwind Second Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Jason Bonfigt, Broadwind's Chief Financial Officer. Thank you. You may begin.

Good morning, and welcome to the Broadwind second quarter 2020 results conference call. Leading the call today is our CEO, Eric Blashford; and I'm Jason Bonfigt, the company's CFO. We issued a press release before the market opened today detailing our second quarter results. I would like to remind you that management's commentary and response to questions on today's conference call may include forward-looking statements, which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the Risk Factors section of our latest annual and quarterly filings with the SEC. Additionally, please note that you can find reconciliations of 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.

Thanks, Jason, and welcome to those joining us today. Despite continued macro uncertainty related to the COVID-19 pandemic, our business performed well during the second quarter, guided by our long-term focus on end market diversification, lean manufacturing processes and disciplined capital management. This strong performance was supported by broad-based revenue growth across our core wind, industrials, steel and natural gas turbine markets during the period. Let's begin on Slides 4 and 5. We generated net income of $0.5 million or $0.03 a share, representing a year-over-year increase of $1.5 million and our second consecutive quarter of profitability. Revenue increased 33% year-over-year to $54.9 million, driven by demand from our wind customers together with customers in multiple nonwind markets. Wind industry sales increased by more than $11 million versus the second quarter 2019, with tower section volumes up approximately 60% year-over-year to the highest levels we've seen since early 2017. Improved plant utilization and operating efficiencies supported year-over-year improvements in both gross margin and operating margin up 40 and 240 basis points, respectively. Our second quarter EBITDA was $2.9 million, an increase of $1 million over the prior year period. Our total backlog decreased 12% sequentially to $112 million due to the timing of customer orders, which were delayed by COVID-19. Our oil and gas customers have delayed scheduled deliveries into the second half, and we expect this market will remain challenged in the near to medium term. I was encouraged by the team's ability to work through the COVID-19-related restrictions and supply chain challenges evident throughout the quarter, positioning us to produce several new wind tower models for both new and existing customers. Orders in the second quarter were $40 million, an increase of 17% sequentially as strength in the Heavy Fabrications orders offset softness in Gearing segment orders. Heavy…

Thank you, Eric. As expected, we delivered our second consecutive profitable quarter in Q2. We generated net income of $0.5 million or $0.03 per share, with significant year-over-year revenue, gross profit and EBITDA improvements. Second quarter consolidated sales were $54.9 million, up from $41.2 million in the prior year quarter, a strong quarter notwithstanding COVID-19 challenges. The increase was driven by improved plant utilization in our Heavy Fabrications segment, which benefited from increased tower and industrial fabrication demand. Our trailing 12-month consolidated sales approached a run rate of $200 million exiting the second quarter, which now includes $65 million of nonwind revenue. Since launching our revenue diversification initiative, we've made significant progress into nonwind end markets and continue to focus building that book of business. The combination of increased wind tower demand, coupled with broad-based customer expansion across multiple end markets, contribute to significant year-over-year growth in the period. Compared to the prior year quarter, gross margins expanded 40 basis points to 9.9%. This continued margin expansion reflects the impact of the improved operating leverage resulting from higher Heavy Fabrication plant utilization. And this benefit was partially offset by lower demand levels in our Gearing business, given the challenges we are seeing in the oil and gas and other cyclical markets impacted by COVID-19. Gross margin declined sequentially in the second quarter, primarily due to higher material content in the current quarter, together with lower operating levels in our Gearing segment. Operating expenses as a percent of sales was 8% and below our long-term target of 10%, primarily due to the improved plant utilization I mentioned earlier, effective cost management, and higher material content on the product mix sold. We are prudently managing operating expenses as evidenced by a 7% increase year-over-year on a 33% revenue increase. Interest expense declined…

Thanks, Jason. Our country has been confronted with a series of historic challenges this year. During this period of widespread volatility, our leadership team has continued to stay the course by focusing on the strategic priorities we discussed earlier this year. These priorities include targeted expansion into our legacy onshore wind and nonwind markets, combined with an entrance into the offshore wind space. On balance, we continue to pursue opportunities where our unique value proposition and industry experience position us to win. As for our response to the COVID-19 pandemic, we are closely monitoring the potential impact of the virus on our operations, customers and supply chain. We've implemented all necessary and appropriate protocols as recommended by the U.S. CDC to ensure the continued well-being of our team. Given that all of our businesses are considered essential and critical infrastructure as defined by the U.S. Department of Homeland Security, our facilities remain open and operational. Should it become necessary, we're prepared to enact a business continuity plan to ensure the continued production and shipment of products to meet our customers' needs. Our order rates have declined since COVID-19 outbreak as our customers are dealing with the overall economic uncertainty we're all facing. We've conducted various stress scenarios in each of our businesses. And while it's difficult to quantify the full impact of the virus on our business and end markets at this time, we anticipate that current availability under our credit line will provide adequate liquidity to support our business during this period of uncertainty. Turning to Slides 14 and 15 for a review of demand conditions within each of the six end markets we serve. Let's begin with the wind sector, which represented nearly 70% of TTM revenue. The outlook for this sector continues to be positive, driven by…

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, Eric and Jason.

Hey, Eric.

Good morning.

Good morning. So you mentioned in the release, looking at strategic alternatives for the offshore market. And just wondering if you could provide any details there, anything you're able to share, whether it's kind of the depth of discussions you're having, potentially how many parties you're having those discussions with and maybe next steps we should look for?

Well, we are having discussions with multiple parties. We're having discussions that include potentially producing on the East Coast and also producing in our Manitowoc facility.

Got it. And then, I mean, I would assume there's some urgency. I mean, there's – it's kind of a mix because you've got these opportunities, and they are off 2023, and as you said, some maybe pushing a little bit to 2024 and 2025. But there also are such substantial announcement gigawatts and such that it would seem like there's some urgency on the part of those OEMs.

Yes, right. There's 6.4 – as I mentioned, there's 25 gigawatts that are forecasted by Wood Mac. There's about 6.4 gigawatts already contracted, and those are due to be installed between 2023 and 2025. And 1.1 – I mentioned that some of it's shifting to the right a bit, but still, there's 1.1 gigawatts projected to be installed in 2023. So really, as far as timing, if we assume there's going to be a greenfield factory that might take up to 18 months to bring online. If we finalize our plans in Q1, we should still have plenty of time to act.

Got it. Okay.

Just to add, we're seeing more activities for gigawatt or project announcements coming. So that's certainly encouraging. And we just need to keep assessing the economics of that market and make sure that if we're going to make this investment that it meets certain hurdles for the company. So I think we're going to continue to assess that and optimistic that we can talk about that towards the end of the year or early next year.

Right. Okay. All right. And then we'll stay tuned for that. And maybe on the recent ITC case, I mean, certainly a positive. I know to some extent, that's the outcome that was expected. And I know it's helped your – the pricing and the margins in your backlog to-date. How do you think that impacts things going forward? I mean is that something where you think it will continue to help the margins in backlog and then in terms of just supply to the overall market? I mean, is this something that potentially makes it supply tight in the market? Or how do you see that playing out?

Just as a reminder, the Department of Commerce and the ITC determined that subject country imports they participated unfair trade practice into the U.S., the U.S. industry. We estimate that about one-third of the towers in the U.S. were from the subject import countries, Canada, Indonesia, Korea and Vietnam. The best result of this is a smooth production and stable production for the U.S. tower manufacturers going forward and capacity utilization, which is really important for all of us. I think the bottom line, though, is that Broadwind and the U.S. tower manufacturers can absolutely compete with anyone in the world on a level playing field, and our aim is to keep that playing field level going forward.

Got it. Okay. Maybe last one for me. Just I know last – on the last call, you had talked about that you've been – you were looking at some potential wind tower orders, whether it was from Siemens Gamesa or your two other customers potentially in the near term. And I guess that's something you're still targeting. Just thoughts on that or maybe status on that? And do you expect – I know you're at 90% of your functional capacity right now for 2020. I mean do you think that you will fill that – the remainder of that here going forward in the somewhat near term?

Well, as far as 2020 goes, Eric, typical lead times for towers are anywhere between four and six months. So it'd be a challenge for us to fill that remaining capacity for 2020. But certainly, regarding 2021, we are in active discussions with a number of the OEMs, and you know we sell to them all now for that capacity. So we're optimistic that we'll be able to fill that capacity through 2021.

We'd expect to begin announcing those orders in Q3 and into Q4. So we'd see more commercial activity happening here in the coming months.

Yes. So I think it's important to keep in mind that, that four to six month lead time, which is typical in our market.

Yes. I knew it was going to be tight but yes, just thought I'd get your thoughts. So I appreciate it. Thanks.

Sure. Thank you.

Our next question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, Eric; Hi, Jason.

Good morning.

So just could you help me reconcile the tower capacity booked at 90% for the year for – through the end of 2020 with potential softness you are anticipating in the fourth quarter. Is this because of the lower order activity in the second quarter? Or is there something else behind this?

Yes. I think – so Q2 was – we operated near our optimal production capacity and we're expecting that for Q3 as well. But I think the – what we did see throughout the quarter was just various – some COVID delays and so there was some weakening in the market. We didn't book the expected orders that we were hoping to fill out for the rest of the year. So I think there will be a little bit of a – somewhat of a downturn in plant utilization in Q4 that we'd expect to rebound in 2021.

Understood. And then I didn't catch some of the last part of your commentary, Eric. And I apologize if I'm bringing this up if you've already addressed it. The decision on the offshore wind, go, no go, I guess, is there something from an investment perspective that you are waiting for or sort of doing diligence on? What would be sort of the catalyst that you – get you over the hump? If there's any sort of challenges that you are looking at before making the call of entering this market.

Yes. I think we would certainly have to have appropriate contracts or orders from our – from various OEM customers to make sure that the investment was justified over – for the multi years. We are contemplating a 200,000 or 300,000 square foot plant in the East, which we think can satisfy a good part of that demand. But if you're asking for a catalyst, we'd have to make sure that our customers have secured orders to support that plan.

And I think that what we're going to be watching very closely are the new projects that are being announced and contracted and secured because that will then – that should drive a catalyst for decisions to be made for offshore tower production plans.

Understood. Got it. And with respect to sort of your backlog and order activity, did anything get canceled that has been in your backlog? Or was mostly everything just pushed out and…

Yes, this is a dynamic. Yes, it’s a great question. This is a dynamic I've heard on some of our customer calls and just general calls is I truly believe that it's a demand deferral and not a demand drop-off because of the uncertainty with COVID in the markets that we participate in. So the answer is no, we haven't any cancellations. It's more – it's deferrals.

And tower off-take from our customers has – we haven't seen – although there's been some supply chain constraints throughout the quarter, we didn't really – we still are delivering against our contracts. I think you're seeing more of a deferral in the oil and gas business that we have and gearing where customers are deferring purchases into the second half.

Okay. And just at a high level from a modeling perspective. So we probably are looking at sequential improvements in the third quarter and then maybe a little bit of a decline in the fourth quarter?

Sequentially, yes.

Okay, perfect. Yes, that’s all I have guys. Thank you so much.

Thank you.

Our next question comes from the line of Justin Clare with ROTH Capital. Please proceed with your question.

Hi guys. Thanks for taking the questions.

Hey, Justin.

Good morning.

Good morning. So I guess just on Q2, the operating margins for Heavy Fabrications moved a little bit lower to 7.3% from, I think, 9.2% in Q1, according to our calculations. I was wondering if you could just help us better understand the reason for the move lower in margins. I would have expected stable to potentially an improvement because sales were up a little bit in Heavy Fab. So any additional detail you can provide there.

Sure. What does move our margins from time to time are related to materials. So in some instances, customers supply materials to us and that would be excluded from our sales price and our material costs. So sometimes you get a bump because of that. And that – we did see that from Q1 to Q2. We had higher material content towers in Q1, and we procured all the materials for those tower contracts in Q2. So that drove quite a bit of a change in our gross margin for the company.

Okay, got it. And then looking into Q3, it sounds like you expect a sequential improvement. I'm expecting that the tower business sales will likely improve in Q3. So what are your expectations on margins there? And then looking further into Q4 with a potential softer quarter, should we see a step lower in margins?

We're thinking that we'll be in the 10% to 11% range with probably on the higher end of that in Q3 and then on the lower end of that range in Q4. That would get us closer to the year to 10.5% to 11% gross margins for the consolidated company.

Okay, got it.

And I think some of that's going to depend on the off-take in the Gearing business. We're making a lot of cost changes and rightsizing the cost structure. So that – our ability to deliver against that and also for customers to take product, I think that will be important on whether or not we can hit those gross margin targets.

Got it, okay. And then shifting to your customers. I know you recently added GE as a tower customer. I was wondering if you could just give us an update on how that relationship is progressing. Are you seeing follow-on orders with GE? Or how are discussions with GE as it relates to tower orders in 2021?

Well, what I would say is there's certain conversations I really can't share with – between Broadwind and customers, but I think the relationship is strong. The conversations are ongoing with all three of the tower customers we're producing for now.

Okay. And then one last one on the offshore opportunity. At this point, are you leaning towards a greenfield facility? Or are you considering supplying offshore from your Manitowoc facility at this point? And then if you are still considering the Manitowoc facility, what would be the timing on a decision you would need to make there? I'm imagining it would be a little bit later than what you might need for a greenfield facility.

Yes, you're right. Am I leaning one way or to the other? I'd say I'm probably 50-50 at this point, maybe a hedge towards the greenfield. I would say you're right. We would have more time for the Manitowoc facility since we already have the land. We have got the building, deepwater port. We just have to make sure some of the equipment was upgraded to handle the larger, heavier towers. So we probably have shoot maybe an extra six months or even more to get this 2023 installed base, Justin, if we elected to go through Manitowoc.

All right. I’ll pass it on. Thanks guys.

Yes. Thanks, Justin.

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

Yes. Thank you, everybody. I really appreciate your interest. We're proud of what we've done so far. We're looking forward to what we're going to do through the rest of this year. We really appreciate your interest and look forward to speaking with you all again. Thank you so much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.