TPI Composites, Inc.

Hello and welcome to the TPI Composites 2Q 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Jason Wegman, Investor Relations. Please go ahead.

Thank you, Operator. I would like to welcome everyone to TPI Composites' second quarter 2023 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 of the Securities Exchange Commission, which can be found on our website, tpicomposites.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 Cywick, TPI Composites President and CEO.

Thanks, Jason, and good afternoon, everyone. Thank you for joining our call. In addition to Jason, I'm here with Ryan Miller, our CFO. Jason is our new VP of investor relations and sustainability and is replacing Christian Eden, who has recently moved to Europe and is now part of our customer facing commercial team. I want to thank Christian for progressing our investor relations program over the last four plus years and for his passion and leadership in advancing TPI sustainability initiatives. Jason brings with him a wealth of experience and numerous financial leadership roles at a multinational aerospace and defense company. I want to welcome Jason to the team, and Ryan and I look forward to introducing him to all of you in the coming days and weeks. With that, let's get to it. Please turn to slide five. To put it simply, it's been a tough quarter. Q2 has been challenging from both an industry and TPI perspective, and I can boil it down to two key issues, quality and volume, both of which I will discuss in a minute. But first, some good news. I'm pleased to announce that TPI and GE have reached an agreement in principle to amend our existing supply agreement in Mexico to add four new lines to produce blades for GE's workhorse turbine in Juarez with an initial term through 2025. TPI and GE expect to finalize this agreement in the third quarter. Quality has been broadly discussed industry-wide over the past several quarters, and quality issues have had a pronounced impact on performance, and we have not been immune to these issues. While the accelerated pace of new product introductions within the industry over the last five years and the push to get larger wind turbines to the market faster has significantly reduced the cost of wind energy, it is also a contributing factor to the wind turbine and blade manufacturing quality issues that have surfaced. As we reported last week, our financial results for the quarter were impacted by a warranty provision for the inspection and repair of blades, primarily related to one blade type in one factory. We have responded to the evolving quality challenges with the following actions. We had a third party complete an in-depth assessment of our existing quality system and are implementing improvement initiatives. We have and continue to engage with our customers more deeply and earlier in the design phase to minimize quality risks in the product design and manufacturing process. The good news is that our customers have significantly slowed the pace of new product introduction and recognize the benefits of standardization and industrialization. We hired Neil Jones as our Chief Quality Officer effective August 1st, 2023. In this newly created position, Neil will oversee all quality processes, systems, and controls relating to TPI's wind business and will report directly to me. Neil brings over 25 years of experience in quality and engineering positions in the wind and automotive industry. Neal spent more than 13 years with Bestas in a variety of quality leadership roles with the last five years as Senior Vice President, Quality, Health, Safety, and Environment. Before joining Bestas, Neal spent over 20 years in the automotive industry, including engineering and quality leadership roles with TRW Automotive and a senior quality leadership role with Eaton Automotive. And finally, we are replacing certain members of our senior team to improve our operational leadership, given the performance and quality challenges the company has experienced during the past year. We are confident that the steps we've taken will significantly reduce our warranty claim exposure going forward. Now let's discuss volume. As we discussed on our first quarter earnings call, we are still working on a handful of volume changes with our customers that will likely net out to lower sales for the year. Given the extended time it is taking to get clear guidance on the Inflation Reduction Act and the complexity of its implementation, ongoing challenges in the EU, and the changing economics of certain markets, our customers continue to apply these on a market-by-market basis while considering existing inventory levels, all of which have resulted in volume changes from three of our four-blade customers in 2023. In addition, there is no doubt that permitting, transmission, transmission queues, the ability of the broader wind industry supply chain to ramp volume, inflation, and cost and the availability of capital are further factors impacting the timing of recovery, which we believe has likely pushed to 2025 as our customers continue to move transitions and new line startups to the right. Notwithstanding, we stand by our mid to long-term sales and adjusted EBITDA targets we had introduced in our 2022 year-end earnings call in February and are focused on positioning ourselves to deliver on those targets as volumes return and then accelerate to more robust levels the industry expects. Now let's cover our overall Q2 results. Sales for the second quarter were $381 million and were negatively impacted by delivery delays of blades from increased inspection and repair activities. We also had lower automotive sales due primarily to lower bus body deliveries and field service sales were down as we had our field service technicians working on warranty related efforts. Adjusted EBITDA was a loss of $38.9 million in the second quarter. As we discussed on our first quarter earnings call, we expect the second quarter to be the low watermark for profitability for the year, primarily due to annual wage increases kicking in, while incremental productivity benefits will be phased in over the second half of the year to offset those increases. However, at that time, we didn't expect the quality challenges I discussed a few minutes ago, which by far had the biggest impact on our adjusted EBITDA for the quarter. In addition to the warranty charge of $32.7 million we recorded, our adjusted EBITDA was also impacted by lower volume than expected, inflation, and higher costs of inspection and repair activities. Now, I'll give you a quick update on the rest of our global operations, including service and automotive. Please turn to slide six. Notwithstanding the challenges we faced in Mexico during the quarter, our blade facilities in India and Turkey performed exceptionally well. Globally, we produced 661 sets and achieved a utilization rate of 85%. In global service, sales were down year over year due to a reduction in technicians deployed to revenue-generating projects. For the full year, we expect revenue to be down by about 30% year over year. Things continue to progress nicely in our automotive business. However, we now anticipate automotive's 2023 full-year revenue to be down from 2022, primarily due to lower bus body sales. We are also experiencing lower than expected sales in other automotive products due to our customer supply chain constraints and customer delays and transitions of new product launches. In the second half of this year, we are planning to launch three new automotive production programs. These programs include large structural panels for a commercial truck, a full battery enclosure also for a commercial truck, and high voltage battery pack thermal barriers for a light duty truck. Our customer diversification initiative is paying dividends as these three launches are each with a different customer, with two of them being new to TPI. In addition, the products being launched show our investment and innovation and new manufacturing technologies are aligned with the needs of the automotive market. To support additional near-term growth, we have and are making additional capital investments in the light resin transfer molding, protrusion, and assembly processes. We expect our Rhode Island and Juarez automotive plants to be vertically integrated for these technologies by year end, which will enable the scaling of our capacity and significant growth next year. We continue to explore strategic alternatives for the automotive business to enable us to scale faster and are encouraged by the initial discussions and expect to have more information to share by the end of Q3. As it relates to our supply chain, the situation is significantly better than during the past two years. We continue to expect the overall cost of raw materials to trend down compared to 2022, while logistics costs have returned to pre-pandemic levels, both of which provide us some tailwinds for the back half of the year. Over the last couple of quarters, we've suggested that 2023 would be a transition year while the industry digests and or waits for formal implementation guidance related to key components of the IRA in the US and clarity around more robust policies in the EU. More and more, however, it's starting to look like the expected increase in volume related to the IRA and initiatives in the EU may not materialize broadly until closer to 2025. Last month, the EU finally signed off on its renewable energy directive after months of negotiations. The emergency measures on permitting agreed last year will now become permanent. That means enforcing the principle that the expansion of wind is in the overriding public interest, applying a binding two-year deadline to all permits, and a population-based approach to biodiversity protection and requiring all EU countries to digitalize their permitting procedures. These new rules are an important step forward and will help unlock the 80 gigawatts of wind farms currently in the permitting pipeline across Europe. EU countries have until the middle of 2024 to implement them. Some are already doing so, for instance, Germany. And there it has led to an increase in permitting rates for wind and to winning appeals against permits that were previously lost. Here in the U.S., although guidance on many of the key provisions under the IRA have been issued, interpreting and getting clarification of the guidance will take some time. As you might expect, with legislation as broad as the IRA, clarity around implementation will take some time. Just last week, the Federal Energy Regulatory Commissioner, FERC, issued a long-awaited final rule on interconnecting generation and storage resources to the grid. Based on initial FERC statements, the final rule will implement, among other reforms, a first-ready, first-served cluster study, providing much-needed relief for nearly two terawatts of renewables and storage that are currently waiting to interconnect. While we recognize the challenges the wind industry continues to face in the near term, with a continued focus on energy security and independence globally, we remain confident that demand for wind energy will strengthen once the current regulatory complexity is deciphered and global economies begin to stabilize. With our current facility capacity of nearly 15 gigawatts, we expect our wind revenue to eclipse $2 billion, yielding a high single digit adjusted EBITDA and a free cash flow percentage in the mid single digits over the next couple of years. Today, we are operating 37 lines, including four lines for Nordex in Mexico. With transitions to larger blades, the startup of new lines, and the completion of the Nordex contract in Mexico in mid 2024, We plan to exit 2024 with 39 lines. These 39 lines will enable us to produce approximately 3,200 sets per year or 15 gigawatts. In IEA's updated net zero by 2050 scenario, wind needs to reach over 400 gigawatts of installations per year with approximately 80% onshore and 20% offshore. Therefore, the market would have to be almost five times larger than it was in 2022. 15 gigawatts of capacity will not be sufficient to meet the long-term needs of our customers, so strategically growing our global capacity and footprint over the next few years is a discussion we are engaged in today with all of our customers, as we are in a unique position to capitalize on the growth in the wind industry. With that, let me turn the call over to Ryan to review our financial results.