Greetings and welcome to Broadwind's Second Quarter 2024 Results Conference Call. All participants are currently in listen-only mode. This conference call is being recorded. I will now hand the call over to your host, Mr. Tom Ciccone. Thank you. You may begin.

Good morning, and welcome to the Broadwind second quarter 2024 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 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. Broadwind delivered a solid Q2, highlighted by a double-digit EBITDA margin, consistent with prior year results despite reduced revenue. Offsetting a transitional pause in new wind tower demand, second quarter results benefited from a higher value sales mix, improved execution and targeted cost reduction actions. We booked $18 million of orders in the second quarter, a year-over-year decline as we saw reduced demand across all segments. Heavy fabrication saw reduced demand for our pressure reduction systems partially offset by increased orders from the wind repowering market. Gearing orders were reduced year-over-year largely due to decreased demand from the industrial and steel sectors, while orders from our Industrial Solutions segment softened compared to the unusually strong aftermarket orders seen last year. At a commercial level, we continue to expand our product mix within higher margin adjacent markets. The Broadwind clean fuels L70 low-flow PRS unit, the third model in this product family, will be released in Q3 as planned, with customer interest expected to be high for this new model. Quoting activity is elevated at all segments and nearly all markets served, including some green shoots in oil and gas, which has been soft in recent quarters. Furthermore, the Gearing division has completed all requirements for the AS9100 quality certification, for which we expect to receive final approval later this quarter. Operationally, we continue to invest in cutting-edge technology to improve our process capabilities, reduce costs and improve our profitability. Brad Foote Gearing has recently installed an industry-leading grinding center. This new equipment replaces several older machines and includes real-time onboard quality inspection, ensuring that the finished product precisely matches the blueprint specifications before the part leaves the machine. We now have the people, qualifications and technology to penetrate the aerospace and defense markets we target. Our focus on team member safety has yielded a 56% reduction in our recordable incident rate so far in 2024, well below the industry average. And we have had zero lost time incidents this year. Most importantly, we are keeping our people safe. But secondarily, we are seeing the financial benefit and reduced costs. Our quality systems, standard work deployment and flexible skills training have allowed us to improve our response time and increase the profitability of the first article and smaller runs often associated with our new customers. Beginning in the first quarter, we undertook significant actions to align our cost structure with the current demand environment. In combination, these actions will contribute more than $4 million in annualized cost savings, which is evident in our results. While total revenue declined versus year-ago levels given lower tower demand, our non-wind activity levels remain relatively stable as we see demand for our precision manufacturing capabilities across multiple markets. In Q2, we generated EBITDA of $3.6 million and net income of $0.5 million. This marks our sixth consecutive quarter of profitability despite lingering wind-related demand headwinds. Quoting activity in our non-wind markets has been robust so far in 2024, and we expect consistent order flow through the remainder of this year despite the continuing softness in the oil and gas gear market. Within our Heavy Fabrication segment, Q2 revenue was $20 million, down 42% from a year-ago, primarily due to the decline in tower production and PRS shipments, partially offset by increased sales of mining equipment. Gearing revenue was $10.5 million, a 5% reduction year-over-year due to broad-based softness across major markets, offset by an uptick in wind gearing sales. Industrial Solutions revenue was $6.5 million, up 3% year-over-year, led by an increase in aftermarket gas turbine content, continuing the positive trend for this business which began in 2022. In summary, I am pleased with the operating performance of all divisions through the second quarter, reflecting solid execution and the quick and substantial cost actions we took this year in response to demand fluctuations in both our heavy fabrications and gearing businesses. With that, I'll turn the call back over to Tom for a discussion of our second quarter financial performance.

Thank you, Eric. Turning to Slide 5 for an overview of our second quarter performance. In Q2, we delivered our sixth consecutive quarter of profitability during a period of softness within the onshore wind energy sector. While revenue was down both sequentially and versus the prior year period, we were still able to maintain a 10% EBITDA margin, which resulted from a favorable sales mix and targeted cost reductions. In Q2, we generated $3.6 million of EBITDA compared to $5.4 million in the prior year quarter. We generated net income of $0.5 million or $0.02 per diluted share compared to $1.4 million or $0.07 per diluted share in the prior year quarter. Turning to Slide 6 for a discussion of our Heavy Fabrications segment. Second quarter orders of $9.1 million are down 26% versus the prior year period as we experienced a decrease in orders for our proprietary PRS units. Wind-related orders were up as we received orders for multiple wind repowering projects, but tower-related orders continue to be limited as a result of the existing backlog that originated as part of our large Q4 2022 supply agreement. Outside of wind and PRS, we experienced a 54% increase in orders within our other markets, most notably within Mining and Industrial. Second quarter revenues were $19.6 million, down approximately $14 million versus the prior year quarter. We sold 58 tower sections versus 138 in the prior year period. This reduced level of tower sales versus the prior year is consistent with our previous commentary regarding the slowdown of Abilene production late in Q4 in response to customer demand. During the second quarter, we recognized segment EBITDA of $2.8 million, a decrease of $2.2 million versus the prior year period, primarily driven by the decreased revenue levels partially offset by targeted cost actions taken towards the end of 2023 and into 2024. Turning to Slide 7. Gearing orders of $4.7 million are down both sequentially and versus the prior year. Oil and gas orders continue to remain muted due to the ongoing low in domestic development activity. We also saw decreases in orders within our steel and industrial markets. Starting in Q3, we have begun to see increased quoting activity, specifically with our oil and gas customers and expect those orders to start to materialize. Segment revenue was $10.5 million, up over $2 million sequentially, but down $0.5 million compared to the prior year quarter. EBITDA increased 14% to $1.2 million in the second quarter, reflective of a higher margin sales mix and targeted cost reductions when compared to the prior year period. Turning to Slide 8. Industrial Solutions recorded orders of $4.5 million in the second quarter, down from $7.2 million in the prior year period. This was attributable to a decrease in demand for our core natural gas turbine offerings, most notably our aftermarket products. Segment revenue of $6.5 million represents a 3% increase over the prior year period. Despite the increase in revenue, we did see a modest decrease in EBITDA from $1 million in the prior year to $0.8 million in the current quarter. This decrease is a result of a less profitable mix of products sold and slightly higher operating costs when compared to the prior year period. Turning to Slide 9. During the second quarter, operating working capital increased approximately $10 million. As we noted last quarter, this increase was expected and is primarily a result of a change in terms with a major customer. Our deposit balance has now returned to a more normal operating level, and we expect there will be less volatility in this balance going forward. During the quarter, we did increase borrowings on our credit facility to fund the working capital increase, but we ended the quarter with greater than $18 million of cash and liquidity. This represents an increase over the prior year of more than $3 million at a comfortable level to support our operations. We expect operating working capital to remain relatively stable for the balance of 2024. Finally, with respect to our financial guidance. Today, we are introducing financial guidance for the third quarter of 2024. Given current expectations and beliefs, we anticipate third quarter revenue to be in a range of $36 million to $38 million and adjusted EBITDA to be in the range of $1.7 million to $2.5 million. That concludes my remarks. I will turn the call back over to Eric to continue our discussion.

Thanks, Tom. Now allow me to provide some thoughts as we enter Q3, beginning with our Heavy Fabrications segment. We believe domestic onshore wind activity is poised to accelerate meaningfully in the 2025, 2026 timeframe, given current indications of interest from customers. We're encouraged by the momentum in the wind repowering segment, which we support through manufacturing that custom tower adapters required to upgrade legacy turbines. A sustained higher interest rate environment has impacted project economics for some developers, leading them to temporarily delay or defer the timing of their investments. However, the price of steel has been dropping steadily in recent quarters, which is positive for the wind industry. Nevertheless, in the interim, our cost structure remains aligned to reflect a period of lower production volumes at our tower facilities while reassigning key talent and available capacity toward non-wind demand across our diverse end markets. We remain highly constructive on the long-term economics of wind, particularly with the 10-year tax credit visibility afforded by the IRA. We are excited about the launch of our newest model in the family of natural gas Pressure Reducing Systems, or PRS. This new model, the L-70, has a compact footprint and lighter weight versus our larger units, making it the ideal solution for industrial applications such as primary or backup power systems and pipeline integrity projects. We're in the prototype phase now, with full release expected later this year. In our Gearing segment, average to broaden our sales mix into less cyclical markets continue, positioning us to realize a more balanced, stable revenue profile. We are seeing some early wins as we leverage our new capabilities to expand beyond traditional gearing into other precision machine products such as spindles and spindle housings used in foundry operations to structural housings and material handling applications. In addition to the experienced commercial sales agent who joined our team last quarter, we've recently added yet another key commercial resource with specific relationships in our target markets of aerospace and defense. Quoting activity remains elevated with a year-over-year increase of 163%. So we're confident that our commercial strategy, combined with our industry-leading capabilities, will yield the diverse revenue growth we want. In Industrial Solutions, the momentum that we've experienced in the gas turbine industry in the first quarter continued into the second quarter as our key customers are seeing strong demand for gas turbine equipment and services. Quoting activity remained robust, up over 30% from the prior year. Also, we are working closely with our key customers to develop capacity expansion plans necessary to support higher-than-expected gas turbine demand they are forecasting over the next several years. We are also expanding our product breadth within the gas turbine market by supporting other high-growth platforms such as air derivative turbines. In summary, I'm pleased with the strong operational performance from our team this quarter as we continue to demonstrate strong execution on our strategic priorities. We've reduced our cost structure during a transitional period for domestic onshore wind demand while retaining and redeploying our talent. We continue to build a firm foundation for steady profitable growth serving the energy transition, infrastructure and other key markets, and look forward to capitalizing on improved demand in the years ahead. With that said, I'll turn the call over to the moderator for the Q&A session.

Thank you. We will now start the question-and-answer session. Our first question comes from Justin Clare with ROTH MKM. Please go ahead with your question.

Hi. Good morning.

Good morning, Justin.

So, I just wanted to start off on Q2. It sounds like there was a higher value sales mix in the quarter, but I was wondering if you could just speak to the specifics a little bit more. And then guidance suggests the EBITDA margin could decline quarter-over-quarter. So wondering how the sales mix is anticipated to change and how that's impacting the margin as we move into Q3 here?

Yes. We've talked about it. The first half has really benefited from a higher margin sales mix. The material content percentage doesn't impact our – the margins that we realized on some of our revenues. So as that fluctuates, we do see better or worse margins. So it just happens to be where we're seeing this more profitable mix. We've had more aftermarket sales, which is one of our more profitable work. And again, I think we've said this in Q1, we do anticipate that, that will reverse in the second half of the year. We do anticipate margins to decrease over the balance of the year.

Okay. Got it. And then I was wondering if you could just provide an update on kind of where we are with the long-term wind order that you are continuing to deliver here. How much of the order is remaining? And then what utilization levels does that support? I mean my understanding was it was about 25% utilization that would be supported through the end of 2025. So if you could just provide an update on, is that still the expectation? And then any potential you see to upsize that order to deliver potentially – deliver on potentially higher demand?

Yes. Thanks, Justin. This is Eric. Yes, you're correct. We did have the agreement with the customer to take the second year of that contract and spread it over 2024 and 2025. We do – we are working with them to deliver just that. We do have good visibility through certainly most of 2025, which would end up completing this particular portion of the contract and are discussing follow-on orders after that. So I think we've got good visibility through virtually all of 2025, certainly through the first three quarters, and it's clearing up in the fourth quarter of 2025. You're right about the capacity. That takes up about half the capacity in our Abilene plant and so we have more to sell. And we've got some customer interest in that. But again, it's a bit of a softer market through 2024 and ramping up through 2025 to a higher market in 2026.

Yes. And just to add some color, our backlog in that segment is about just almost $110 million, I would say $90 million of that roughly is related to that order.

Okay. Got it. Appreciate it. And then so wondering, just following on that, what level of interest you're seeing for your Manitowoc facility in terms of wind towers. And then you mentioned Abilene, but – just trying to think through when we might see an increase in your order flow for wind and when you think the utilization level of your facilities might ramp up? Is it more into the 2026 timeframe before we see a meaningful kind of inflection point? What are your thoughts?

So I would say, Justin, it would be, I would call it, through 2025. I'd see the ramp-up coming towards the end the second half of 2025 into a stronger 2026 and even you get a stronger 2027. Interest with Manitowoc, we have two customers that expressed interest in Manitowoc, but again, that's more towards the end of 2025 when they're seeing some of their projects come to fruition.

Okay. Got it. I appreciate it. Thank you.

Thanks, Justin.

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

Good everyone. Thank you for taking my questions.

Good morning.

Just following up on the wind questions. It looks like you are seeing some positive, I guess, developments for orders in the future. But at what point do you expect customers to start booking capacity for orders that may start materializing or need to be delivered in 2025 on top of the backlog you already have?

I'd expect to start seeing orders towards the end of 2025 and in the first quarter of – I'm sorry, end of 2024 into the first quarter of 2025 to secure that capacity towards the end of 2025. Typically, again, as I mentioned before, the lead times for towers are about six months, a little bit shorter now because steel has a shorter lead time. So they have time but they certainly don't want to miss out on capacity that they need. So I'd expect them to start booking orders for 2025 towards the end of 2024 into the first quarter 2025 for deliveries at the end of 2025 and into 2026.

Okay. Understood. And just again, just a clarification on the available capacity. Is it 50% available capacity in wind? Or is it 75% available capacity in wind?

Yes. That's a good question. If we assume that both of our plants are available for wind, and we don't have other production going on, I would say we're at 75% – we're 25% booked through the majority of 2025 for our capacity. So we've got plenty of capacity to sell both in terms of wind tower capacity but other industrial fabrication capacity as well.

Okay. Thank you, Eric, for that.

You bet. Sure.

On the Industrial Solutions side, you've been making good progress in sort of diversifying into new opportunities outside of wind. It looks like the more recent efforts have been on just improving operational efficiencies and you're seeing the result of that in your financials already. From a investing and just or an investment perspective in terms of continuing to grow the non-wind side of things, are we already taking steps to capture some of those opportunities through new investments, et cetera? Or is that going to take a little bit longer given sort of maybe balance sheet constraints, et cetera, that you may have?

Well, we do have a three-year plan, which includes investments in technology and capability improvements, both to keep ourselves current and competitive with our present customers but also to provide capacity and capability for our new customers. And so part of that three-year plan does include some investment in the Manitowoc facility to accommodate growth in such as material handling, steel, marine, a little bit of defense potential there in Manitowoc as well as, as I mentioned, you didn't ask specifically but I mentioned in the prepared remarks, what we've done for gearing. We invested in five multi-access, multitask machines in gearing, which really allows us to penetrate new markets versus just traditional gearing and gearboxes.

Okay. And when you think about the opportunity that you can address within, say, gearing, et cetera, how big could revenues potentially be with the current infrastructure you have for the gearing segment?

We've modeled that and depending on the level of completeness we bring materials, in other words, we can bring materials in roughly – rough machined, which helps with capacity. I think we could easily reach north of $70 million within our present four walls here. So virtually almost nearly double, nearly double.

Okay. Understood. Thank you. Just one last one on the cost side of things. This $4 million in annualized cost savings, have all of those been implemented so far? Are you still working on making those changes?

I would say, by and large, the vast majority of those changes have been implemented already. We may not see 100% of the benefit until the second half of the year but all of them have been implemented as of today.

Okay. Thank you, Tom. That's all I have guys. I appreciate it.

Thank you.

Thanks, Amit.

Our next question comes from Eric Stine with Craig-Hallum. Please proceed with your question.

Hi, Eric. Hi, Tom.

Hi, Eric. Good morning.

Hey. Good morning. So just going back to the large wind order just to clarify, so it sounds like you are working towards potentially a follow-on order rather than an order that would fill up more of 2025 capacity. And I just ask because that customer has got to be quite bullish about. Just wondering, is there any potential that you add to something that might impact 2025? Or is it really a 2026 event, if there is a follow-on?

Well, to reiterate, we've got lots of visibility through most of 2025 – through the third quarter of 2025 and indications of interest from that and other customers beyond that. So the answer is yes. We could see a ramp-up of production towards the end of 2025 – or through 2025 towards a higher level of output towards the end of 2025 and into 2026.

Okay. Got it. And maybe if you think about how past cycles have played out, you're sitting there right now with roughly 50% of Abilene open but that is in a pretty ideal location. So I mean do you anticipate that if you were to see another OEM put in an order that kind of starts to spur activity because there is some scarcity value to that open capacity? Or is it something where it's just really hard to call the timing, you're confident in the long-term and you'll just see how it plays out?

Well, we try to – we follow the projects. We also follow the geography of the projects, Eric. So if a project that, as an example, would be to the northwest of us, where we have some competition, the customers might not need our capacity as much. But if it's the east or southeast of us, they very much need it. So I think the demand for Abilene will be strong, certainly through our planning period and we look out three years. We think that will be strong. Would McKinsey and other data analytics firms support that? But again, it really depends on the project geographies, when the projects come to fruition and where they come to fruition. If it's near Abilene, there's definitely near – definitely a demand for us. If it's 400 or 500 miles to the north or the west of us, the customers have other choices besides Broadwind.

Okay. That is helpful color. And then lastly, you mentioned the ultimate capacity you see in gearing. And then I know aerospace and defense are two key markets, with that, with what AS9100 approval on the horizon. I don't know if you've done it but are you willing to kind of size how you see the aerospace and defense opportunity as you think medium and long-term?

Well, I'll tell you that the opportunity is huge. It's in the billions. These – the customers are interested in our capabilities because they are somewhat unique within our size of company, that's why I call it kind of industry-leading technology. We're having indications of interest from multiple customers. But when you're thinking about defense and aerospace, the timing of the FAA and the timing of qualifications tends to be rather lengthy in terms of one year to 18 months, I think it could be a sizable portion of our business. Certainly, as we end 2025. We're talking in certainly seven figures. I don't know if I would call it $5 million but certainly, the expectations are high in that market. But again, it takes time to earn these customers. And once you do, they're very sticky.

Yes. Okay. Thank you very much.

Thank you, Eric.

Our next question comes from Martin Malloy with Johnson Rice. Please proceed with your question.

Good morning. Just wanted to ask about the natural gas systems business within industrial. Could you maybe talk about what you're seeing from customers in terms of demand and remind us a little bit about that business in terms of who you're working for there, the OEMs or the owners of the facilities? It appears that demand for natural gas turbines is set to accelerate here. I'm just curious how you see your demand developing.

Yes, thank you. That's a great question. We do see demand for virtual pipeline equipment increasing. We see that market to be between $500 million and $600 million, growing to about $900 million over the next seven or eight years. It is capital intense. It's a capital product. So our customers who are natural gas providers, if you're a company that needs natural gas via virtual pipeline, if you don't have a traditional pipeline to your facility and you need either temporary or permanent gas supply, you will call one of our customers, such as Sunbridge, Liberty. There's a number of them that are operators and provide natural gas. And so the reason this market can be somewhat spiky is because there's been an initial tranche of orders as they build up their equipment to satisfy the market. But as the market expands and they get jobs that they may not have thought they were going to get, they buy equipment, which is why our PRS demand was a little bit softer in Q2. We're seeing great indications of interest in our funnel. But when the customers need the products it's normally when they win a job and then they'll purchase from us directly.

Thank you. I'll turn it back.

Thanks, Marty.

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, for listening and I look forward to coming back to you to report our Q3 results. Thank you.

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