TPI Composites, Inc.

Greetings. Welcome to the TPI Composites third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Christian Eden, Investor Relations at TPI Composites. You may begin.

Thank you, Operator. I'd like to welcome everyone to TPI Composites' third quarter 2021 earnings call. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risk and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of other factors discussed in today's earnings news release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission. each of which can be found on our website, tpicomposites.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Bill Cywick, TPI Composites President and CEO.

Thanks, Christian, and good afternoon, everyone. Thank you for joining our call. In addition to Christian, I am joined today by Brian Shoemaker, our CFO. I will briefly review our third quarter results, including the strategic financing transaction announced today. I will also cover our global operations, including our supply chain and the wind energy market more broadly. Brian will then review our financial results and financing activities in more detail, and then we'll open the call for Q&A. Please turn to slide five. Today, we announced that we signed a contract with Vestas to add three additional lines in Yangzhou, starting production in 2022, and we extended a two-line contract with Nordex in Turkey. These deals added approximately $150 million of potential future revenue under contract. I am also pleased to announce today that we have entered into a stock purchase agreement to issue and sell $400 million of Series A preferred stock to investment funds managed by Oak Tree Capital Management. Under the terms of the agreement, TPI will issue and sell $350 million of Series A to Oak Tree subject to customary closing conditions. TPA also may elect at its option to require Oak Tree to purchase an additional $50 million of Series A upon the same terms and conditions as the initial issuance of Series A during the two-year period following the closing of the initial issuance. Subject to the mutual agreement of TPI and Oak Tree, Oak Tree may invest an additional $200 million for follow-on capital. Oaktree is an experienced investor across the power and energy value chains, and today's announcement is a strong endorsement of our strategy and growth prospects. Oaktree's investment will strengthen our balance sheet significantly and positions TPI to navigate a rapidly evolving market and operating environment in the near term while providing the flexibility to take advantage of longer-term growth opportunities. We will discuss the terms of the Oaktree investment in more detail later in the call. Before I jump into our results and operations, it's important to note that we remain focused on operating our business safely while continuing to mitigate the impacts of COVID-19 and ensuring that we are prepared to deal with continued resurgences of the virus in any of our global locations. We have and will continue to adapt our operating procedures in order to enable our associates to work safely and continue to meet our customers' demand. To summarize, Q3 was clearly disappointing from a financial perspective, as market conditions continue to deteriorate, as most of our customers have already discussed publicly. So, although we delivered net sales of $479.6 million, a slight increase over Q3 of 2020, we ended the quarter with break-even adjusted EBITDA. The takeover of the Nordex facility in Matamoros has not gone as planned, and we have experienced significant delays in production while needing to upgrade the team. We are in the process of transforming the operations into a world-class facility like the facility we operate across the street, but it's taking more time and resources than originally anticipated. This was one of the primary factors for our poor financial results during Q3, and it will carry over into Q4 as well. However, we expect to have the operation stabilized by the end of the year and plan to have a much more successful 2022 in this location. In Juarez, Mexico, we are in the middle of a transition to an innovative blade, and with innovation sometimes comes challenges. In addition to delays moving from design to prototype and finally to production, we encountered multiple delays related to specialized equipment and component parts. As a result, our volume for the quarter was negatively impacted as our full year volumes. As with our new operations in Matamoros, we expect these challenges to be behind us by the end of the year and anticipate reaching full production volume in that factory during 2022. In China, our Yangzhou factory was shut down for three weeks due to a small COVID outbreak in Yangzhou City. We lost 10 sets in the quarter, but we expect to make those up in Q4. Supply chain and logistics challenges continue to plague the industry, and we were not immune from them in Q3. Certain customer-directed raw materials were in short supply, which caused production slowdowns in multiple plants. Lost volume related to these shortages was nearly 80 sets in Q3 and will be just over 150 sets for the full year. Furthermore, raw material and logistics costs remained at elevated levels and had an overall impact in the quarter of approximately $20 million and an estimated full-year impact of nearly $30 million. With the announced suspension of production in our Iowa plant at the end of 2021, volumes at that plant were reduced to minimize production risk as we wrap up our current customer commitment in that location. With these challenges and those facing the industry over the next year or so, Our focus has been on managing our liquidity and raising additional capital to strengthen our balance sheet and to prepare for the next wave of significant growth in the industry. Our announcement today of the strategic investment by Oaktree will provide us with the additional flexibility to manage our business through these near-term headwinds. Turning to slide six, I'll now give you a quick update of our global operations as well as a market update. During the third quarter, we did not have any lost volume at any of our facilities related to COVID-19 outbreaks or government mandates except for the short interruption in yangzhou however we did experience material unexpected production delays in turkey mexico and china because of shortages of customer directed and supplied raw materials we continue to evaluate our global footprint to ensure it is optimized for us our customers and the market as we discussed last quarter we are planning to consolidate our chinese operations into yangzhou to reduce costs, streamline activities, and meet the expected future demand of our customers. Our Yangzhou facility is world-class and can handle both onshore and offshore blades. This prime location is the ideal place to consolidate our China operations and efficiently serve our customers. With respect to the facility in Juarez that will become available in 2022, we are actively seeking to backfill the four production lines with one or more customers, as we believe these operations will continue to be one of the best Low-cost options for blade supply into the US and Mexico in the future. Interest for this capacity is high, but timing is dependent on the US market recovery and the final provisions of the Build Back Better Plan, if passed. We are not anticipating any production in this facility during 2022. Due primarily to continued uncertainty regarding the regulatory environment and the expected impact on U.S. demand over the next couple of years, we do not currently have any planned volume for our Newton, Iowa facility in 2022. As a result, we are in the unfortunate position of needing to suspend manufacturing at the facility at the end of December 2021. We have extended the facility lease through 2022 to give us and our current customer or others Time to evaluate the final provisions of the proposed Build Back Better plan to determine if the facility can be economically viable in the future. With respect to our global service business, during the third quarter, we continue to focus on profitable global growth. Our team has been successful in securing new work from OEMs as well as asset owners. To accelerate our growth in Europe, our plan is to open a training center in Spain in the fourth quarter to complement our Americas training center. We expect to have 3X top line growth during 2021 and expect another doubling in 2022, all on an organic basis. On the transportation front, our pilot production program for a production passenger electric vehicle manufacturer has been extended as we have demonstrated the ability to scale our production in a cost effective manner on our high volume composite production line. This has also led to another pilot program with the same OEM that will kick off in Q4 of 2021. Additionally, we are continuing to collaborate with multiple OEMs on cabin body structures along with other critical EV components. As I mentioned earlier, our supply chain, like every other supply chain, is continuing to face challenges. As discussed on the last call, we have seen increased costs relating to resin, carbon fiber, and logistics. While we can pass on a majority, and in some cases 100% of the cost increases to our customers, the portion we are not able to pass on has had a material impact on our margins, and we expect that impact to continue through the balance of 2021 and through 2022. After increasing by almost 80% globally year over year, resin prices were flat in the third quarter, but we did see a slight tick up in October with a continued focus on margin expansion by our supply base. We do, however, expect pricing to continue to be relatively flat in the first half of 2022 before beginning to drop in the second half. Capacity constraints continued for carbon fiber with pricing up over 20% year over year. With demand exceeding supply in multiple industries, we expect pricing to increase in 2022, virtually all of which we can contractually pass on to our customers. Overall, we expect to be able to hold the average bill of material costs for customers for which we control the supply chain to a less than 2% increase over 2021 levels and expect to see commodity pricing begin to normalize in the second half of 2022 for many commodities. Logistics costs are also expected to remain high throughout most of 2022. So turning to the overall wind market in slide seven, since our last call, the Build Back Better plan was introduced and includes a 10-year PTC extension with prevailing wage and apprenticeship requirements. Importantly, the bill includes a 10-year direct pay provision although it requires certain domestic content requirements to be met to obtain 100% direct pay. The BBB also includes an advanced manufacturing production credit of $0.02 per watt from 2022 through 2026 on U.S.-manufactured wind blades, and then it is phased down through 2029. So as an example, the blades for a 4-megawatt turbine would receive an estimated $80,000 tax credit. As with the PTC, direct pay would be available. Other aspects of the bill that may help grow the wind market include storage and transmission tax credits and grants, loans and tax credits for hydrogen made from renewable energy. In addition, there are significant grants, rebates and tax credits to drive the acceleration of the decarbonization of the vehicle fleet for both electric passenger and commercial vehicles and charging infrastructure, which we believe could help accelerate the growth of our transportation business. Finally, the now-passed Infrastructure Investment and Jobs Act includes $550 billion in new federal investment in U.S. infrastructure to help tackle climate change by making investments in clean energy transmission and electric vehicle infrastructure, electrifying thousands of school and transit buses, and creating a new grid deployment authority to support upgrading the electric grid. This should be a further catalyst for renewables and EV growth in the U.S. Notwithstanding the positive long-term impact in the U.S. of the Build Back Better Plan and the Infrastructure Investment and Jobs Act, we expect decreased demand during the remainder of 2021 and expect volumes and therefore blade revenue and adjusted EBITDA on a billing basis to be flat or slightly down in 2022 due to less than optimal capacity utilization due to uncertainty in the U.S. market and elevated raw material and logistics costs globally. Thank you. Longer term, we believe the future for wind energy will strengthen significantly, given the necessity to decarbonize and electrify to meet the aggressive goals set by nations around the world to combat climate change. In its roadmap to zero emissions by 2050, the International Energy Agency expects that by 2030, 390 gigawatts of wind will be installed annually, or about four times more than the global record set in 2020. We believe that we are uniquely positioned with our global footprint in key strategic geographies to grow our market share with the industry-leading turbine OEMs through this expected period of rapid growth. The next decade is both critical and a terrific opportunity for TPI. Before I turn it over to Brian, I would like to reiterate that we remain focused on the health and safety of our associates while executing on our operating imperatives and ESG goals, which include safety, diversity, inclusion, and driving to become carbon neutral by 2030. With that, let me turn the call over to Brian.