TPI Composites, Inc.

Good afternoon and welcome to TPI Conference's third quarter 2022 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, today's conference is being recorded. We have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Christian Eden, Investor Relations for TPI Composites. Thank you. You may begin.

Thank you, operator. I would like to welcome everyone to TPI Composites' third quarter 2022 earnings call. We will be making forward-looking statements during this call that are subject to risks and uncertainties, which could cause actual results to differ materially. A detailed discussion of applicable risks is included in our latest reports and filings with the Securities and Exchange Commission, which can be found on our website, cpicomposites.com. Today's presentation will include 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 Sidewick, CPI Composites President and CEO.

Thanks, Christian. And good afternoon, everyone. Thank you for joining our call. In addition to Christian, I'm here with Ryan Miller, our CFO. Today, I'll discuss our third quarter results, our global operations, including our service and transportation businesses, then cover our supply chain and the wind energy market more broadly. Ryan will then review our financial results and then we'll open the call for Q&A. Please turn to slide five. We believe we are well positioned to address the current energy security and climate change crisis by helping to accelerate the shift towards a renewable powered world. The recent passage of the Inflation Reduction Act in the U.S. and the actions under the EU's proposed repower EU plan are just two catalysts to help drive that acceleration. However, a tightened energy supply, rising inflation, elevated logistics costs, geopolitical conflicts, and permitting and siting delays are jeopardizing the speed of that ship as well as impacting our profitability and demand in the near term. So while we have seen demand impacted by these challenges, the medium to long-term outlook for wind energy remains strong. Our mission is to continue to navigate through the near-term headwinds and prepare ourselves and our suppliers for the projected long-term growth of the wind industry both domestically and internationally. Our strategic initiatives have not changed. Safety of our associates is, of course, job one, and that is followed by continuing to improve our and the industry's quality, reduce our cost structure, optimize our manufacturing footprint and utilization, deeply collaborate with both customers and suppliers, drive innovation, expand our offerings, and be laser-focused on liquidity and balance sheet strength. So while the balance of 2022 and 2023 will continue to be challenging, our team is up to the task and remains committed to improving our operating and financial results. As it relates to the third quarter of 2022, we delivered sales of $459.3 million during the quarter, which was down from prior year. However, sequentially, sales increased over the second quarter by 1.5 percent, and our adjusted EBITDA was 16.4 million, including several non-recurring and or unique events that Ryan will outline later. Overall, a solid quarter, given the economic environment we are operating. We are also pleased that we have executed several contract extensions since the last earnings call. We extended two lines for Enercon and Trichier through 2025, as well as four lines for Nordex through 2023. In preparation for the expected growth in the U.S. market, we have signed an agreement with GE Renewable Energy that enabled us to secure a 10-year lease extension of our manufacturing facility in Newton, Iowa. Under the agreement, GE and TPI will be developing competitive blade manufacturing options to best serve GE's commitments in the U.S. market with production expected to start in 2024. We have agreed in principle with GE to extend all our lines in Mexico through 2025 and expect to finalize and execute the contract extensions before the end of this year. With this extension, we now have nine lines under contract with GE plus the five lines of potential capacity in Iowa. We are currently discussing a long-term partnering agreement to provide more capacity and flexibility along with higher utilization of our manufacturing capacity. More to come on this. Finally, we have agreed in principle to a seven-year global partner framework agreement with Vestas that aims to provide flexibility along with more capacity for them while enabling better facility utilization for us and the geographies that we serve Vestas. Together, we are investigating market-driven opportunities for local blade manufacturing of the B236 blades in Asia, the U.S., and Europe, And we are collaborating in the design phase of the V-163 blade while assessing the optimal manufacturing setup for this blade. Given the near-term challenges the wind industry is facing, we are commencing multiple cost savings initiatives to better position us for 2023 in the long term, including optimizing our global manufacturing footprint, reducing headcount primarily in geographies most impacted by demand, and reducing or eliminating loss-making operations. While a plan has not yet been initiated and therefore not finalized, we intend to cease production at our Yangzhou China manufacturing facility in December 2022. During the fourth quarter, we expect to record material restructuring and impairment charges with respect to closing this facility, additional headcount reductions in our other manufacturing facilities and corporate functions, as well as actions related to loss-making operations. We expect these actions to result in structural cost reductions of approximately $20 million to be realized in 2023 and beyond, while continuing to focus on operating efficiencies to drive annual productivity savings of over $20 million per year, which we have consistently achieved over the past three years. During 2023, we expect 36 lines to be in production. With the right sizing and optimization of our global footprint, and upon completion of current customer contracting, we expect to initially have as many as 14 lines with GE, 13 lines with Vestas, 12 lines with Nordex, and two lines with Enercon, for a total of 41 dedicated lines out of a total footprint capacity of 47 lines, which excludes the eight lines of capacity we currently have in China. At full capacity annually, we can produce up to 3,900 sets or approximately 15 gigawatts with a revenue potential of $2 billion. Turning to slide six, I'll now give you a quick update of global operations, supply chain, as well as the wind market. Our plants in China and India performed well ahead of plan in Q3. Our Turkey A plants are also well ahead of plan for the year, notwithstanding a short labor disruption in the quarter as we worked with the union to address the inflationary pressures on wages. As a result, sales for the quarter were impacted by approximately $8.9 million, most of which we plan to recover in the fourth quarter. Moving on to Mexico, in early August, TPI was requested by one of our customers to temporarily suspend production of one blade type manufactured in one of our Mexico sites due to a design change. TPI supported our customer with an expedited review and implementation of the new design and production resumed in September. The suspension of production impacted third quarter sales by about $12 million with minimal impact on earnings. Operations in our Nordex facility in Matamoros have improved, but we are still challenged from a profitability standpoint. Although we are working with our customer to determine how to best reduce the impact of this operation going forward, The negative impact on our overall adjusted EBITDA margin from this facility is expected to be approximately 250 basis points for the full year and was approximately 270 basis points in the third quarter. Bottom line, our blade operations, except for the newest facility in Matamoros, and notwithstanding the disruptions this quarter in Turkey and Mexico, we have performed extremely well. Excluding the challenges from the Matamoros operations, our adjusted EBITDA margin in the third quarter would have improved from 3.6% to 6.3%. In our service business, we are on track to exceed the 40% to 50% top-line growth expectations that we shared with you earlier this year. During the third quarter, our field service business grew sales 73% compared to the prior year. Our field service business generates higher margins than our blade manufacturing business, and we expect them to improve as the business achieves scale and therefore be more accretive to our overall margins over time. In our transportation business, supply chain issues have continued to impact us due to reduced volume needs by our customers. We now expect transportation revenue to grow by approximately 10% in 2022. Looking ahead into 2023, we believe that volumes and revenue will grow significantly compared to 2022, especially in our non-bus business as supply chain constraints ease. We are continuing to make progress through adding new development programs and converting programs to production. Since our last earnings call, we have kicked off production tooling with a Class 8 customer, and we plan to start serial production of large cab structure components in the first half of 2023. We have also kicked off serial production for another automotive program for battery pack components. This is our third serial production program with this customer. The awarded development programs are growing our customer base with the market segment leaders in commercial delivery and passenger vehicles. These programs have validated the cost and performance benefits of composites while allowing us to demonstrate our technical expertise, and develop tooling and manufacturing processes that provide higher value-added solutions with low investment industrialization. We expect the Inflation Reduction Act to be a demand catalyst in the U.S. for commercial vehicles, given the many provisions including the commercial clean vehicle credit, alternative fuel vehicle refueling property credit, and the clean heavy-duty vehicle grants and rebates, just to name a few. Moving on to our supply chain, the situation continues to be challenging. In the third quarter, although we saw price increases due to the higher energy prices in Europe, we did not have issues securing material to ensure uninterrupted production, and we have seen logistics costs start to come down, but still high relative to pre-pandemic pricing. As we look out into 2023, we expect pricing for raw materials to increase overall by low single-digit percentage. However, due to our contract structure and shared pain gain approach, we expect to be able to reduce the impact of TPI's margins to close to zero or even have a slight net benefit. We are continuing to diversify and de-risk our supply chain by qualifying sources in the regions in which we manufacture products to reduce the impact of high logistics costs provide security of supply, and build long-term strategic partnerships with key suppliers to ensure the best pricing and availability in the short, medium, and long term. On to the wind market. A quick update on RepowerEU, which targets 510 gigawatts of wind energy by 2030, up from approximately 190 gigawatts today. WindEurope expects that the negotiations between the European Parliament and the 27 member states on the Renewable Energy Directive to conclude by the start of 2023. This year, over a third of all of our blade shipments have been into Europe, so it remains an important market for us, and we expect the implementation of RepowerEU and the growing need for energy independence in Europe to accelerate our growth in the region in the future. In the U.S., we are certainly pleased with the passage of the Inflation Reduction Act of 2022. We believe this will bring long-term incentive certainty that is needed to supercharge the investment in clean energy construction and put the U.S. on a path to reach its Paris Agreement emission reduction pledge and be a critical contributor to energy independence. The historical key driver of the U.S. wind market, the production tax credit, has effectively been extended until the later of 2032, or when greenhouse gas emissions have been reduced 75% compared to 2022, which means it is likely that the PTC can last for the next two decades. One of the unique provisions of the bill that directly impacts TPI is the advanced manufacturing production credit that we believe will provide a credit of two cents per watt per blade. To put this in context, this could be $80,000 for a four megawatt blade or $240,000 per turbine. This would be on top of the domestic content adder of 10% that should also increase demand for TPI blades. The industry is waiting on guidance from the IRS and the Treasury Department, among others, to define and clarify the implementation of this complex legislation. We are in the middle of strategic planning discussions with our customers on how to best utilize the IRA and expect that we will have more clarity on our customers' needs over the coming quarters and as the guidance around implementation is released. So stay tuned for more information to come. Well, we recognize the challenges the wind industry faces in the near term. We are confident demand for wind energy will strengthen over the mid to long term, given the focus on energy security and independence globally and the necessity to decarbonize and electrify to meet the aggressive goals set to combat climate change. We believe TPI remains in a unique position with our global footprint and key strategic geographies, along with strong partnerships with our suppliers and our customers, to grow as the demand for wind begins to accelerate again. To repeat what I stated earlier, execution, cost control, right-sizing, and liquidity are at the forefront of our priorities while continuing to move forward on multiple strategic initiatives to enable TPI to capitalize on the expected long-term growth and development. With that, let me turn the call over to Ryan to review our financial results.