Greetings. Welcome to Broadwind's Second Quarter 2022 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Tom Ciccone, Chief Accounting Officer. Thank you. You may begin.

Good morning and welcome to the Broadwind second quarter 2022 results conference call. Leading the call today is our CEO, Eric Blashford; and I'm Tom Ciccone, the company's Vice President and Principal Accounting Officer. 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 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 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 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.

Thanks, Tom and welcome to those joining us today. During the second quarter, we generated strong year-over-year revenue growth within our Gearing and Industrial Solutions segments. While non-wind orders increased more than 60% in the second quarter when compared to the year ago period. Once again, our non-wind business proved to be an important offset to a continued pause in wind tower demand as the market attempts to manage true policy uncertainty, such as that around the proposed extension to the federal production tax credit, or PTC, together with the still elevated raw material costs such as steel play. At this time, we believe the wind market will begin to recover in 2023 and are encouraged by the recent congressional efforts to pass the proposed Inflation Reduction Act, or IRA that includes several major renewable energy provisions, most notably an extension of the PTC on projects beginning construction before January 1, 2025. Operationally, labor remains a challenge but we're seeing improved recruitment levels in several of our markets. We continue to closely manage the impacts of cost inflation and have adjusted our quoting models to reflect rising costs. We're effectively managing our cash and expect to have liquidity remain at current levels by year-end calendar 2022. During the second quarter, we delivered $50 million of revenue, an 8% increase year-over-year, led by growth in our Gearing and Industrial Solutions segments which posted gains of 37% and 43%, respectively. And excluding the PPP loan forgiveness and ERC impact in Q2 2021, adjusted EBITDA increased $300,000 year-over-year. We continue to work with our turbine OEM customers who have placed orders to secure about 50% of our optimal 2022 tower capacity and are now reserving capacity into 2023. Tower quoting activity is increasing as our OEM customers work to secure tower production capacity…

Thank you, Eric. Turning to Slide 5 for an overview of our second quarter performance. Second quarter consolidated sales were $50 million compared to $46.5 million in the prior year quarter. Versus the prior year, Q2 sales increased in our Gearing and Industrial Solutions segments but remain flat within Heavy Fabrications. Sales in both the Gearing and Industrial Solutions segments benefited from strong recent order intake and Gearing saw revenue increases in most end markets served partially offset by a reduction in wind which tends to fluctuate based on customer order patterns. Within Heavy Fabrications segment, tower sections sold were down almost 50% but we benefited from an increase in repowering activity as well as a 150% increase in industrial fabrication revenue, also a byproduct of strong recent order intake for that product line. In Q2, we recognized $400,000 of adjusted EBITDA compared to adjusted EBITDA of $12.8 million in the prior year second quarter. It should be noted that the prior year second quarter results include a $9.2 million benefit related to the PPP loan forgiveness, together with a $3.6 million benefit attributable to the ERC as outlined in the provisions of the CARES Act. Excluding the impact of these unique benefits, adjusted EBITDA increased by $300,000 when compared to the second quarter of 2021. Turning to Slide 6 for a discussion of our Heavy Fabrications segment. Second quarter orders were $12.9 million, a 12% decrease from the prior year period. This decrease in segment orders is attributable to the industry-wide pause and overall wind activity. While we continue to experience weakness related to our wind tower line, there was strong interest in our industrial fabrication products. Industrial fabrication orders increased nearly $8 million or 250% versus the prior year quarter. The most significant driver of this increase was…

Thanks, Tom. In the near to medium term, we view the IRA as a positive potential catalyst for the wind sector as it clarifies the long-term tax policy guidance long awaited by developers. If passed into law, we believe this, along with rising commercial and industrial demand will help drive increased wind installations over a multiyear period. As we continue to augment our wind business with complementary products, our progress continues across a number of diverse end markets. Customer and market diversification remains central to our overall plan, providing opportunities to optimize our production facilities as wind projects vary from quarter to quarter. Renewables and other forms of clean power remain core to Broadwind, even as we expand our revenue streams outside of wind. Today, our fastest-growing nonwind markets include power generation, mining and the industrial vertical which includes our increasing penetration into the infrastructure and material handling markets as well as new inroads into the building and marine industries. In our Heavy Fabrications segment, we're adding some automation to improve our plant throughput, optimize labor and reduce cost as we continue to work with customers to book capacity into 2023 for towers and other industrial fabrications. The proprietary PRS introduced last year to serve the virtual natural gas pipeline market is progressing nicely with development activity on track and orders slightly ahead of plan. In our Gearing segment, we continue efforts to broaden our sales mix into less cyclical markets, offering a more balanced revenue stream. We continue to work with our customers to share inflationary cost increases as quickly as possible to preserve margins. The new machining centers are now fully operational and we look forward to leveraging their capabilities to expand capacity reduce costs and open new markets. We are working to expand our labor force to meet the increasing demand and have launched a limited third shift to address certain production bottlenecks. Additionally, we've upgraded key management in our heat treat business to leverage available capacity to capture external growth opportunities. In our Industrial Solutions segment, we're expanding our market share both domestically and internationally, including the growing aeroderivative segment of the gas turbine market. We're seeing increased quoting activity in adjacent markets such as distributed power, wind and solar. In summary, Broadwind remains an active participant in the ongoing clean energy transition. We see long-term growth for the domestic wind market, given that wind energy continues to be one of the most cost-competitive energy technologies available. Our broadening customer set and increasing precision manufacturing capabilities create new business opportunities to help offset the normal order fluctuations in the markets we serve. We are carefully managing costs, CapEx and liquidity during this pause in wind activity, while executing against new market opportunities. And lastly, we remain adequately capitalized to support our growth strategy. With that said, I'll turn the call over to the moderator for the Q&A session.

[Operator Instructions] Our first question is from Justin Clare with ROTH Capital.

So first off here, just wanted to talk a bit more about the Q3 guide. I was wondering if you could provide a bit more on what’s driving the sequential improvement in adjusted EBITDA. And just how you’re expecting your revenues and EBITDA margins to trend in Q3? Are you anticipating some of the pricing increases that you’re implementing rolling through in Q3 and potentially enabling higher margins here?

Yes. Thanks, Justin. In terms of revenue, I think we'll assume -- we're projecting revenue to remain relatively flat in Q3. In terms of guidance. I think what's benefiting our improved outlook is just some price realization that's coming through the P&L based on pricing actions that we've taken.

Okay, that's helpful. And then, I just wanted to see what you're hearing from customers on the potential for a pickup in wind tower demand if the Inflation Reduction Act were to pass. And how quickly do you think you might see a pickup in tower demand? And when could that flow through into revenue? Is that something that you could see in the back half of 2023? Or could you see something earlier? And then, also just if the legislation passes, do you think customers are going to try to act quickly to secure tower capacity, especially given that there are domestic manufacturing credits which could enable you to lower your costs?

Yes. Thanks, Justin. We certainly see the IRA as giving some policy clarity that the market has been waiting for, for literally a couple of years now, it seems. We expect the benefit to really take a couple of quarters, maybe three or four quarters to be fully realized. I do expect quoting activity to increase, frankly, the phones are ringing a lot more frequently now than they were just a couple of weeks ago. They're just interested in our capacity availability into next year. And even into 2024, so I do expect customers. I do expect this a bit of a logjam or this pause to break free over the next couple of quarters. And as you're aware, the lead times for towers is about 26 or so weeks. And so if we see orders breakthrough in Q4, Q1 and Q2 of 2023, we could see revenue benefit towards the end of '23 and certainly into '24.

Okay, good to hear. And then, just one more. I was wondering if you’d share how much of the current U.S. wind market is being served domestically and I’m thinking about tower producers here versus how much is being served by imports, given that there’s the domestic manufacturing credit in the IRA I’m imagining that the domestic manufacturers such as yourself could see a significant benefit and be much more competitive. So just wanted to see if we could better understand the opportunity there.

Yes, I can speak in generalities there because the timing of the import data is two or three quarters behind but in general, if we say there's about 3,000 or 3,500 towers produced in the United States every year, about 1,000 additional of those will come imported. So we could see essentially, if that is truly a barrier, an additional 1,000 towers needed in a normalized annualized market which would be a benefit to all U.S. manufacturers.

Our next question is from Sameer Joshi with H.C. Wainwright.

Just digging a bit deeper on the prior question on EBITDA expectations. If the revenues are flat and this pricing action is helping, does that mean volume sales are down -- expected to be down next year -- I mean next -- this quarter?

No, I think it will be in the same range as where we're at this quarter. We're trying not to give revenue projection just because of some of the uncertainty related to supply chain and we might have some things that slip in and out of the quarter. But I think a lot of our -- what I maybe should have mentioned to Justin is probably some of the increase in EBITDA that we might be expecting is really related to mix. We also have maybe a stronger mix in Q3 than we did in the first half of Q1 -- first half of the year, I should say.

Yes. The mix was going to be my next question. See, 1 year from now, if you’re also sharing or utilizing the capacity for towers, what do the blended contribution margin looks like from the different segments?

Well, we don't talk about contribution margin publicly. But what I will say is that we do have the ability to generate double-digit EBITDA percentages within our Heavy Fabrications segment, when we're operating at full capacity. So there is the opportunity to approach that should the tower market get to the point where it was in its strongest point. So there is that opportunity and we're working towards that.

Right. And just in terms of capacity, if there is a resurgence in the wind following the IRA passage, how would you manage utilization between the different orders and demand that you have from different segments?

That's a really good question. We have been able to maintain our tower capacity in both plants, even during this pause. We've been able to shift labor for the most part from the tower manufacturing part of the business to the industrial fabrications. We do see with a sustained order book in a stronger market, we will be able to recover our labor because we did have to let some labor go especially in our Manitowoc facility because of the drop in tower demand. But we do believe we can produce both towers and industrial fabrications in those plants because we have maintained the capabilities to do both.

Understood. Got it. And then just one last one. The drop in customer deposits, what does it signify? And how should we look into -- how should we look at it as it impacts working capital going forward?

Well, I'll address the issue what we can see from it. That's really a product of mix because certain customers require capacity reservations and we like to have those in the form of deposits. Other customers, we negotiate different terms with. So I would read that -- read into that as a mix change that could also recover if our mix would go back to a more of a former mix. But regarding working capital, I'll turn that over to Tom.

Yes. I think the only thing I’ll add is I think we’ve seen a significant increase in working capital related to drop in deposits. We don’t foresee that being a significant factor going forward, that could ebb and flow going forward based on customer mix like Eric alluded to.

Our final question is from Eric Stine with Craig-Hallum Capital Group.

So maybe just on the IRA and potential passage here, I know we focused a lot on onshore. But in terms of offshore and some of the aspects there. I mean, do you think maybe too early to see OEM activity or actions be impacted by that? But does that change your calculus at all? Or how are you thinking about offshore?

Offshore is out there several years, Eric. And I think if we talk to the OEMs, they would say the same thing. This is certainly encouraging and seen as a stimulus. But there are a lot of other variables with offshore that we're not seeing, we don't have simply in onshore. So, I think the impact of the IRA on onshore would be much sooner than the impact on offshore. So it doesn't really change our thesis regarding offshore. It's of interest to us. We certainly are studying it but we would need to have a strong partner and OEM partner and developer partner in order for us to take the CapEx required to produce a manufacturing plant, somewhere on the East Coast.

Yes, understood. Maybe just sticking with the legislation. I know you've talked about some new markets in Heavy Fab. And so hydrogen and carbon capture, obviously, have a big component of this legislation. So I guess, kind of thoughts along those same lines.

Yes. I think that's exciting. We like to support all forms of renewables. We are primarily wind, as you know. But we see the CNG market which is also leads right into the RNG market which is renewable natural gas, it captures the methane from digester -- through digesters in farms and landfills and things like that. So the technology we've developed with the CNG, this PRS, this pressure-reducing system for CNG virtual pipeline can be and in fact, we are looking into using that for RNG, a little bit further out, Eric, in terms of hydrogen blends and hydrogen. So we definitely see this IRA as a catalyst to that. And it just reinforces that we're on the right track. When we take a look at the Clean Fuel segment, of the market going forward.

Yes. Okay. And then last 1 for me, just on the diversification. Obviously, great trends here. In Gearing, Industrial Solutions and industrial fab, I mean do you -- I know that, that was something where you needed higher energy prices, we certainly have that but it does seem like -- I mean, you’ve got more drivers than that alone. I mean, do you -- do you feel that the traction you’re seeing right now is sustainable? And your thoughts because, obviously, it’s been quite good here over the last couple of quarters.

Yes, we do. We track sales funnels, we track opportunities. We track markets. And we do see that the order trends we're seeing in those diverse markets sustaining over the next several quarters. So we're confident in that. What's nice about those markets is they're diverse. In some cases, they're countercyclical to wind which is good and that's certainly what we want. And as you penetrate those customers, you tend to stick with those customers because it’s not easy to get spec-ed in and we are becoming more and more spec-ed in to those customers’ products. So I do think there’s stickiness there and I do think it could be sustained certainly over the next several quarters as we wait for the wind market to recover.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thanks, everyone. We appreciate your interest in Broadwind and look forward to coming to you again shortly and talking about our Q3 results. Thanks, everyone. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.