Greetings, and welcome to Broadwind's Second Quarter 2023 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Ciccone. Thank you. You may begin.

Good morning, and welcome to the Broadwind second quarter 2023 results conference call. Leading the call today is our CEO, Eric Blashford; and I'm Tom Ciccone, the company's Vice President and Chief Financial 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 results 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 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 continue to demonstrate strong execution on our strategic plan while capitalizing on balanced demand strength across our diverse end markets. At the same time, we delivered sustained price discipline, drove efficient materials procurement, and reduced our freight expense and introduced process enhancements, which, together with the benefits of the IRA-related tax benefits, translated to significant year-over-year margin expansion and improved profitability in the period. This strong performance was partially offset by planned maintenance at our Abilene manufacturing facility where we are retooling and automating portions of our coding system. The planned maintenance at Abilene resulted in an EBITDA impact of approximately $0.6 million in the second quarter or $0.03 on an earnings per share basis. Indications of interest from our OEM customers, together with continued stability across our diverse non-wind markets have contributed to improved stability and optimism across our business. As we look to the second half of the year, leading us to increase our adjusted EBITDA guidance for the full year 2023. The positive momentum within our legacy wind business, together with traction within new, higher-margin adjacent markets that leverage the unique intellectual property we're developing here at Broadwind reflect meaningful progress on a strategic plan, one that emphasizes profitable growth across a broader spectrum of energy transition and clean tech opportunities. As we further expand our product and service capabilities, we expect to drive improved asset utilization and unit economics consistent with our focus on driving improved margin realization through the cycle. We booked $25 million in orders in the second quarter down about 3% from the prior year quarter as softness in Gearing orders from the oil and gas market were mostly offset by increases in industrial fabrications orders for the Mining…

Thank you, Eric. Turning to Slide 5 for an overview of our second quarter performance. We had a strong second quarter one highlighted by significant margin expansion and growth in adjusted EBITDA. In Q2, we recognized $5.4 million of EBITDA compared to $0.4 million in the prior year second quarter. The $5 million increase in improved margin realization is due primarily to the benefits attributable to the advanced manufacturing production tax credits or A&P credits, we earned this quarter associated with our wind tower production together with solid overall operational execution. We generated net income of $1.4 million or $0.07 per diluted share in the second quarter. After adjusting for over $1 million of proxy contest-related costs incurred in the second quarter, we generated $2.4 million of net income or $0.11 per diluted share. Turning to Slide 6 for a discussion of our Heavy Fabrication segment. Second quarter orders were $12.4 million, a decrease of $0.6 million from the prior year period. As I stated last quarter, based on the timing of the large multiyear tower order that was received late in 2022, we expect tower orders to be limited when compared to prior periods when orders were placed in more regular intervals. The Q2 orders did include over $8 million related to our proprietary mobile PRS units, a record for that product line. These orders included both our medium flow and newly introduced high-flow PRS model. Second quarter revenues were $33.9 million, up sequentially but down 1.6% versus the prior year quarter. We recognized less tower sections in the current year quarter, primarily due to the planned maintenance in our Abilene manufacturing facility. Partially offsetting the impact of lower tower sales was an increase in Industrial Fabrication revenue, reflective of higher demand for our PRS product offerings. During the…

Thanks, Tom. Looking ahead, the IRA-related tax benefits remain a significant catalyst for new in investment over the coming 24 months. Our win backlog has grown substantially since its passage. Customer interest remains strong and the market remains active, reinforcing our view that wind is positioned for a sustained period of expansion. As we look forward to the second half of 2023 and into next year, we have increased visibility and an improved backlog in each of our operating segments. As we build on our legacy in wind to expand into new adjacent markets in clean tech, clean fuels, solar, power generation and infrastructure. We continue to evaluate a number of inorganic growth opportunities that could accelerate our entrance into these and other complementary high-value markets. As mentioned earlier, in our Heavy Fabrication segment, we have added coatings automation to improve our plant throughput and leverage labor as we work with our customers to prepare for the expected years long increase in demand. The line of proprietary natural gas pressure-reducing systems introduced last year is progressing as per our strategy. We've released our second model in that product family, the H250 high-flow unit, and we're pleased with the order activity we received for that model so far. We have also introduced rental options and preventative maintenance programs for this product line in response to customer demand. Given our current capacity, we expect to generate approximately $20 million in annual incremental revenue from these products by 2025 at attractive margins. In our Gearing segment, efforts to broaden our sales mix into less cyclical markets to achieve a more balanced revenue stream going forward, remain important for us. And we've expanded our technical sales team to improve our response time. Order growth from the industrial and steel processing segments has been strong.…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Eric Stein with Craig-Hallum. Please proceed with your question.

Hey, Eric and Tom.

Hey, Eric. Good morning.

Good morning. Maybe just starting on the tower side. I mean, obviously, Abilene filled to a large extent, makes sense given its location. I'm just curious, could you talk a little bit about the Wisconsin plant. I mean what do you feel like you need to see in the industry to start to gain confidence in timing. I mean, obviously, that will be filled at some point. Is it activity picking up in the Midwest and wind markets that are closer? Is it waiting for other plants, industry-wide to fill up that might be in more advantageous locations? Or how should we think about that?

Yeah. I think certainly, we see about 44 megawatts or 44,000 megawatts or 44 gigawatts of demand in the northern region. We do see it in kind of the central northern region, kind of the Dakotas and west of there. So we would need to see some of that demand materialize. Again, there's plenty of demand there in the eastern part of that region. We do expect that to happen. What's encouraging to me is that 44 gigawatts is a lot of demand, and this is in terms of announced advanced development, even some delayed projects. This does not really include what's already under construction. So the demand is there. But you're right, we would not -- we would need to start seeing some of that demand materialize in the northern and the eastern most part of that region, meaning Minnesota, Iowa, the Dakotas versus Wyoming, Montana and further west.

Got it. And then in terms of just other I mean, other plants is that -- so it really is more just activity in starting up closer to Manitowoc rather than just capacity being filled industry-wide in other locations?

Correct. I mean we are on the eastern side of that, Eric. So we've got some competitors that are more West. And so you're correct, as they fill up and their demand goes western, then we would fill up.

Got it. Okay.

Again, other plants in Minnesota and Iowa, et cetera.

All right. That is helpful. Thanks for that. And then maybe just turning to the guide on EBITDA. I know that Abilene, just the work there, you're obviously setting up for the back half and into 2024 and it limited Q2, but the EBITDA guide does imply that it would be down potentially sequentially or down from Q2? And I'm just trying to make sense of that given if you're going to be heavier on the wind side, you get more of the A&P. Just thoughts on that. Are there other parts of the business, whether it's mix or something else that may limit EBITDA in the back half?

Yeah, Eric, thanks for the question. I think a lot of it has to do with the fact that we had a -- we executed very, very well in Q1 and Q2. As you mentioned, the mix was very favorable in Q1, Q2, and some of that will turn around in the latter half of the year.

Got it. Okay. But wind, obviously, I mean, that will strengthen. It's simply mix in other parts of the business?

Correct.

Okay. And then maybe last one for me, just on kind of thinking about 3Q-4Q, as you see the order book and the timing. I mean, do you -- is it how should we think about these? I mean, are they at this point, similar looking quarters? Or do you envision 1 quarter higher than the other?

From the order book, I would say it's consistent from the year on out. Tower orders, as you know, Eric, have been traditionally spiky, and we won this really nice order late last year. So we do expect order activity to continue. I don't see a number of very, very large ones over the next six months or so. But I do see strong order flow in the other businesses, Industrial Fabrications, Industrial Solutions, and, to a lesser extent, Gearing for the rest of the year.

Okay. And then from a revenue I guess just the revenue linearity of revenue for the back half of the year, I mean, is it fair to say that right now, I mean, they look like pretty similar quarters? Or is one at least at this point, looks like it might be higher?

Yeah, I would say we've got tower projects in both of our plants, the one in the northern plant, a lot of that will ship some -- most of it will ship in Q3. So Q3 will be a stronger quarter than Q4. But the latter half of the year will be balanced other than that.

Okay. Thank you very much.

Thanks, Eric.

Our next question is from Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you, good morning, guys.

Hey, Amit.

Just following up on Eric's question you answered last question and answer to that. In terms of the backlog, you had this big win late last year. So it looks like there's nothing significant that may be coming up that may be of that size this year. But the pipeline going into next year, are there deals of that size or similar sort of bigger or smaller, I guess, that could materialize for you and help maybe ramp utilization even better?

Sure. There are always larger deals that are percolating. I do expect some maybe smaller deals to materialize over the next couple of quarters for smaller tower deals and perhaps larger ones into '24, potentially late '23 into '24.

Okay. And with the visibility that you have right now, will that -- say, by the end of '24, will you potentially be at full capacity levels? And then how do we plan for growth ahead of that?

This is to Eric's question, it has the full capacity, especially in the northern plant has to do with these is about 44 gigawatts of data coming of tower demand coming online, turbine demand coming online. The timing of that is slower than the timing in the southern part of the wind belt. So I would say, over the next couple of quarters, we should see that demand increasing. As far as full capability capacity in the northern plant, I would not look to that until perhaps into 2025.

Okay. Thank you for that. Maybe just last one for me, guys. The strength in the non-wind business, is this just being driven by like sort of a stronger market environment? Or is there anything you've been doing as a company from a sales and marketing perspective that is helping you perform better in these segments?

Yeah. We've had a diversification strategy for a couple of years now. I've spoken about that a number of times. We have hired some experts in our sales force to go after specific industries. As an example, the mining industry in Gearing and material handling in Gearing to help us diversify from oil and gas. As far as Industrial Fabrications, we are leveraging the capabilities we have in our northern plant that has excess capacity or available capacity because of the tower softness right now to go after markets such as construction, material handling, mining, marine. And we've had great success there and growing success there. Plus, let's not forget our proprietary products that are coming out. They came out last year, and it will continue to come out over the next year or so. Furthermore, Industrial Solutions business, that's dependent on the global demand for natural gas turbine utility scale, global natural gas turbine demand around the world, and that is increasing. In fact, that's been at its highest point since the acquisition in 2018.

Understood. Okay. That’s all I have, guys. I'll take my other questions offline. Thank you.

Thank you.

Our next question is from Justin Clare with ROTH MKM. Please proceed with your question.

Yeah. Good morning. So I first wanted to ask about the Abilene facility. Just given the bookings that you have for that facility, the visibility into demand, could you update us on how you're thinking about the capacity at that plant? Are you thinking about expansion? If so, how much capacity could you add? And what would be the time frame? And then also if you could address what the cost might be in terms of the CapEx requirement?

Well, we're continuing to study opportunities to expand that plant. We've got customer interest in that plant, and it continues to grow. We have conducted and continue to finalize studies on what it would take in terms of time and investment to expand that plant anywhere from 10 to upwards of maybe 50%. We're evaluating that. And that could be an investment, I would say, it could be $40 million or $50 million on the high side.

Got it. Okay. And then you did indicate in the prepared remarks that the A&P credit balance is expected to increase through the year on the balance sheet here. I was wondering if you could just update us on your plans for monetizing that credit. Could you look to monetize the credit early? Or are you likely to wait for your tax return to get the cash payment there? It sounds like from others that we talked to, the pricing could be in the low 90s -- $0.90 on the $1 or so. But just wondering if you could talk through kind of your strategy there.

Yeah. Thanks, Justin. We have been looking at monetizing them. The market has been slow to develop, at least from our perspective. We're trying to reach out to interested parties. We have several conversations. There's an aspect to the guidance that came out, which would make us kind of more inclined to transfer if possible. So we definitely were interested in doing so. But at this point, we don't have anything -- nothing is imminent at this point.

Got it. Okay. And then just one more on domestic content. We have received some guidance from the treasury on the domestic content requirements. And it looks like the towers really are going to have to be manufactured in the U.S. to qualify for the domestic content adder. So wondering if that's changed the discussions that you're having with customers at all? Are you anticipating really the vast majority of U.S. demand being met by domestic sources? And maybe you can just speak to what that might mean for the supply and demand dynamic that you're seeing out there?

Yeah. We do see -- we certainly are appreciative of that finding as a U.S. company. We do believe that it's in our customers and the developers' best interest by U.S., by domestic. And yes, that certainly helps with increasing the demand for our towers here in the U.S. I think there will be a good balance between the supply and demand curves going forward with some announced expansions in our industry plus the available capacity that we have and others have that can be brought online. So I think there will be a nice balance to support the U.S. industry and maintain adequate pricing.

Okay, great. Appreciate the time. Thank you.

Thanks, Justin.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Eric Blashford for closing comments.

Yes. Thanks, everyone, who participate in the call today and listen to the call today. And we look forward to coming to you with our Q33 results. Have a great day. Thank you.

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.