TPI Composites, Inc.

Hello, and welcome to the TPI Composites third quarter 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 of Investor Relations. Please go ahead, sir.

Thank you, operator. I would like to welcome everyone to TPI Composites third 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 with the Securities and 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, and thank you for joining our call. In addition to Jason, I'm here with Ryan Miller, our CFO. Today I'll discuss our results and highlights from the third quarter, our global operations, 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. Despite the challenging global wind market and economic climate, our operational execution in the third quarter was in line with our expectations, but our overall results were negatively impacted by an incremental warranty charge and charges related to the unexpected pro terra bankruptcy. The third quarter was highlighted by strong cash performance as we ended the quarter with $161 million of unrestricted cash due to our continued focus on balance sheet efficiency and cost controls. We are confident that a liquidity position will enable us to deal with the near-term challenges the industry is facing and provide us with the runway required to execute and attain our long-term financial targets. We also made progress during the quarter with our customers on several fronts to gain visibility into volume and capacity needs in 2024 and beyond that are part of our pathway to those long-term targets. Therefore, we expect to announce final signed contracts by the end of the year for a number of extensions, startups, and transitions. Please turn to slide six. To summarize our operations for the quarter and the blade business, although we continue to work through some challenges in Mexico, our blade facilities in India and Turkey continue to perform exceptionally well. Globally, we produce 666 sets, or 2.9 gigawatts, with a utilization rate of 85%. As anticipated, our global service business is down year over year due to a reduction in technicians deployed to revenue-generating projects due to the warranty campaign we are working on. For the full year, we expect revenue to be down about 40% 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 Proterra bus body sales because of their bankruptcy. It's important to note that the reduction of sales to Proterra does not have a meaningful impact on TPI's go-forward EBITDA and cash flow given that the bus volumes forecasted by Proterra were never achieved and the program was operating at about breakeven. In addition, the automotive business is also experiencing lower than expected sales in other automotive products due to our customer supply chain constraints and delays in new product launches. With that said, we are planning to launch three new automotive production programs in the fourth quarter. These programs include large structural panels and a full battery enclosure for two Class 8 commercial truck customers and a 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 in innovation and new manufacturing technologies as aligned with the needs of the automotive market. We are continuing to explore strategic alternatives for the automotive business and are encouraged by the progress we have made and expect to have more information to share by the end of the year. As for our supply chain, the situation continues to be significantly better than during the last two years. The overall cost of raw materials has continued to trend down compared to 2022, while logistics costs have returned to pre-pandemic levels. We expect to see additional cost savings in 2024, given the excess capacity for many of our inputs and a slowdown in demand in China. However, we will need to keep an eye on the events in the Middle East and the potential impact that may have on petroleum prices, which could impact the cost of certain feedstocks as well as transportation costs. Over the course of the past few years, we have seen numerous government policy initiatives aimed at expanding the use of renewable energy, including the passage of the Inflation Reduction Act in the U.S., and several policy initiatives in the EU that are expected to simplify regulations, speed up permitting, and promote cross-border projects to accelerate climate neutrality in Europe. We expect that the new government policy will accelerate long-term growth in the wind industry, Despite these favorable long-term policy trends, we don't expect an increase in demand until 2025, while the wind industry awaits clarity on the implementation guidance related to key components of the IRA and clarity around more robust policies in Europe. In addition, permitting, transmission, transmission cues, the ability of the broader wind industry supply chain to ramp volume, rising interest rates and inflation, and the cost and availability of capital are further factors limiting the timing of the wind market recovery. Specific to TPI, we currently expect to have six lines in startup and four lines in transition during 2024. As our customers prepare for stronger expected demand beginning in 2025, which will impact utilization and output during 2024. Furthermore, we expect demand from one of our customers to be down in the near term as they consider their existing inventory levels and contemplate changes in geographic demand, which are expected to result in lower volumes from the underutilization of certain lines and a reduction in overall lines from that customer. So while we do not expect 2024 to be a year of growth for TPI, we do expect to make significant improvements to our EBITDA and EBITDA margins. Today we are operating 37 lines, including the four lines in Mexico for Nordex that we will transition back to them in the middle of 2024. With the transition of lines to larger blades, the startup of new lines, and completion of the Nordex contract in Mexico, and a reset of lines with Vestas, the current plan is to exit 2024 with 36 dedicated production lines. During 2025, we'll be working through additional startups and transitions and expect to have all of our capacity under contract, resulting in 39 lines of production as we exit 2025. With all that as a backdrop, we continue to stand by our mid- to long-term sales, adjusted EBITDA, and free cash flow targets. With our current manufacturing capacity of nearly 15 gigawatts, We expect our wind revenue to eclipse $2 billion, yielding a high single-digit adjusted EBITDA margin and a free cash flow percentage in the mid-single digits over the next couple of years. Now, with that, I'll turn the call over to Brian to review our financial results.

Please turn to slide 8. All comparisons discussed today will be on a year-over-year basis for continuing operations compared to the same period in 2022. Please note our prior year financial information has been restated to exclude the discontinued operations from our Asia reporting segment as we shut down our manufacturing operations in China at the end of 2022. In the third quarter of 2023, net sales were $372.9 million compared to $384.4 million for the same period in 2022, a decrease of 3%. Net sales of wind blades, tooling, and other wind-related sales, which hereafter I'll refer to as just wind sales, increased by 6.4 million in the third quarter of 2023, or 1.8%, compared to the same period in 2022 due to higher wind blades produced, favorable foreign currency fluctuations, and an increase in tooling sales in preparation for manufacturing line startups and transitions. The increase in wind blade volume was primarily driven by lower production in the prior comparative period due to a temporary production stoppage in the third quarter of 2022 in one of our Mexico plants as a customer implemented a blade redesign and a reflavored disruption in Turkey A in the third quarter of 2022 as we worked with the union to resolve inflationary pressures on wages. These higher blade sales were partially upset by lower average sales prices due to the impact of raw material and logistic cost reductions on our blade prices. Field services sales decreased by 10.1 million in the third quarter compared to the same period in 2022. The decrease was due to a reduction in technicians deployed on revenue generating projects due to an increase in time spent on non-revenue inspection and repair activities. Automotive sales decreased by 7.9 million in the third quarter compared to the same period in 2022. This reduction is mainly due to a decrease in the number of composite bus bodies produced due to Proterra's bankruptcy during the third quarter of 2023. In addition, sales of other automotive products were down due to our customer supply chain constraints and delays in transitions of new product launches. Net loss attributed to common stockholders from continuing operations was $72.8 million in the third quarter of 2023, compared to a net loss of $21.8 million in the same period in 2022. Adjusted EBITDA for the third quarter of 2023 was a loss of $27.4 million compared to adjusted EBITDA of $5.1 million during the same period in 2022. The decrease in adjusted EBITDA during the third quarter was primarily due to $22.6 million of credit losses and charges related to the bankruptcy of Proterra and a $13.5 million incremental warranty charge as we revised estimates related to the warranty campaign announced in the second quarter. Excluding these two items, adjusted EBITDA would have been $8.7 million or 2.3% of sales. Moving to slide 9, we ended the quarter with $161 million of unrestricted cash and cash equivalents. We had $196 million of debt, which includes the $132.5 million convertible notes we issued in March and credit facilities we utilized in Turkey A and India to manage working capital. Our debt levels were stable from the end of the last quarter. We had negative free cash flow of $20.8 million in the third quarter of 2023 compared to negative free cash flow of $29.4 million in the same period in 2022. The net use of cash in the third quarter of 2023 was primarily due to our EBITDA loss and warranty costs incurred, partially offset by working capital improvements. We continue to place a significant focus on preserving cash and ensuring we efficiently deploy our working capital to make sure we can comfortably execute key initiatives as we move forward. We do expect a modest level of cash burn during the balance of the year as we satisfy our warranty commitment, implement quality improvement initiatives, and invest for growth. As we look beyond 2023, I want to provide some commentary on why we remain confident in our liquidity. The biggest change you should expect is a return to positive EBITDA in 2024 as we get a number of significant items in the rearview mirror. For example, we expect significantly reduced warranty costs. which this year include $47.8 million in charges primarily related to a single campaign. We additionally expect to avoid approximately $40 million of anticipated losses in 2023 from the Nordex Matamoros facility, since we will hand it back over to Nordex at the end of the contract period on June 30, 2024. We also don't expect to experience another customer bankruptcy charge that impacted our 2023 EBITDA by almost $23 million. And finally, we expect to move our field services technicians back to more revenue-generating service work and less non-revenue warranty work. Other areas we expect our cash flows to be positively impacted are advances from customers to help facilitate startups and transitions we will be executing in 2024, And as I have previously mentioned, we are continuing to work down our work-in-process inventory and optimize our working capital efficiency. Offsetting these sources of cash will be CapEx, primarily related transitions and startup of idle lines, interest and taxes, and as of now, cash payments to Oaktree for the preferred dividends. We believe our balance sheet, our projected liquidity position, and our operating results will enable us to navigate the short-term challenges and invest in our business to achieve mid- to long-term growth targets of $2 billion-plus in wind sales and high single-digit adjusted EBITDA margins. Moving on to slide 10, given all that transpired in the third quarter, we are updating our financial guidance for the year. We now expect sales to be approximately $1.5 billion. This is about $50 million lower than the midpoint of our previously provided sales guidance, which is being driven by two factors. First, our customers are working through rationalization of their own inventory levels, and as a result, we are experiencing some weak and near-term demand. Second, as we matured our discussions on transitions with two of our customers, we will begin to wind down production on some lines in the fourth quarter to begin the decommissioning process of the lines and to ready ourselves for transitions in 2024. We've also revised our full-year guidance or adjusted EBITDA to a loss of about 5%. Our loss is driven by the warranty campaign, the Nordics Matamoros facility losses, the Proterra bankruptcy charge, increased cost of inspections and repairs, and the impact of diverting our field service technician to non-revenue warranty work. As we look to the fourth quarter, I'm expecting a modest loss as our Nordics Matamoros plant will be back in full-scale production. The other factor that will negatively impact adjusted EBITDA in the fourth quarter is that we plan to have lower sales than previously expected and significantly reduce our work-in-process inventory, which will create negative cost absorption impacts in our factories. This reduction in work-in-process inventory is driven by the previously mentioned line transitions, and we are also planning to drive our work-in-process inventory levels down to lean out our balance sheets. These reductions will temporarily negatively impact adjusted EBITDA, but they will allow us to harvest cash from the balance sheet as we head into another transition year in 2024. With that, I'll turn the call back over to Bill.

Thanks, Ryan. Please turn to slide 12. We remain bullish on the long-term energy transition and believe we will continue to play a vital role in the pace and ultimate success of the transition. We remain focused on managing our business to the short-term challenges in the industry and are excited about how well we are positioned to capitalize on the significant growth the industry expects in the coming years. I want to thank all of our TPI associates once again for their commitment, dedication, and loyalty to TPI. I'll now turn the call back to the operator to open it up to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press lower than 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Eric Stein with Craig Hallam. Please go ahead.

Hi, everyone. Thanks for taking the questions. So last year, I know that when you were talking about your line expectations, I think you were expecting 39 exiting 24. Now it sounds like that's 39 exiting 25. So can you just walk us through kind of the puts and takes? Is that simply just timing of startups being pushed out, now taking longer, or maybe just walk through that for us?

Okay. You know, I'd say from a big picture perspective, over the course of the last few months, we've matured a lot of the discussions with our customers on lines and where they're going. And just part of that has been what we started to talk about last quarter. We are seeing a slide to the right. You know, when we talked last quarter, you know, there were a lot of startups and transitions, and we thought we'd be at 39 and 25 when we exited. We don't think that's changed right now. We still expect to be at 39. The timing of some of those transitions and startups is moving around. I'd say as we think through, you know, where we're at right now, we expect to – There'll be some puts and takes, but as we look at 24, we expect to exit with around 36 lines today. And then we'll grow that throughout with additional startups in 25. Also, there'll be some transitions whereby we'll bring in longer blades, and there's a few factories where those longer blades consume more space, and so we actually go down a few lines. because of that. But I'd say there's still lots of moving parts, and I'd say we're still in probably the sixth or seventh inning of a lot of these customer negotiations and discussions. And where we're at today is we'll be exiting 25s, and we'll be on pace to be at that $2 billion-plus in sales and high single-digit EBITDA margins.

You got it. You mean exiting 25, you think you'd be in a position to do that?

Yeah, we'll be on a run rate as we exit 25 is our current expectations.

Got it. Okay. And then maybe just sticking with the customer conversations. I mean, the quality issues, and I know that it's not something you've necessarily dealt with in the past and felt like it's relatively contained, but I also know this quarter there was more there. Just confidence that this is not part of a larger issue and curious what the conversations look like. with your customers? I mean, I know that in some cases these are based on their designs. And so, you know, how much of this is on TPIC and how much is on the customers?

Yeah. Hey, Eric. It's Bill. Good to talk to you. You know, when we announced the warranty provision last quarter, we were still pretty early in the execution of that. And So that's why we added two at this quarter. So there's nothing different. It's just we have better information today than we did when we talked last time. And I would say, yeah, we believe, you know, our conversations with our customers, if it's a warranty charge, it's on us. Eric, let's be clear with that. Now, you know, there are times when a blade fails or there's blade issues and it's a design issue, and then that's not a warranty issue for us. But if there's a warranty charge that we talk about, then that is on us. It can be complicated by design, but it's on us. But conversations with our customers are, you know, we've taken many steps to improve our quality systems, to enhance our quality systems, I should say. I would say the industry is very sensitive to quality today given everything that we've seen in the press from a number of the OEMs. And so the conversations with our customers are very constructive. We're in this together. We're working together to make sure that, you know, we have processes that can meet their design specs. We are working with them very early in the design process to make sure that what they're designing is manufacturable in an efficient and effective way. So very constructive discussions, and we believe we have our arms around the issue that we announced last quarter. And to the extent there are material issues, we disclose them as we did. If we don't disclose anything, it's because they're not material and they're just normal course.

Got it. Okay, thanks.

Yep, thank you. The next question will come from Morgan Reed with Bank of America. Please go ahead.

Hi, thanks for taking the question. I know that we were just kind of talking about some of the new opportunities in the industry and that you're having a lot of productive conversations with OEMs as you all work through product quality issues as sort of a collective industry. Just curious if you're seeing any sort of emerging market share opportunities or emerging sort of near-term opportunities as one of your competitors kind of deals with its own product quality issues and is potentially pulling back on some of their commitments for the near term. Just curious if there's an opportunity for you all to pick up some demand there.

Well, again, so that would be our customers that would be looking at expanded market share as a result of that particular OEM's challenges with the onshore space. With that said, clearly, if there's market share gains by our customers, that certainly provides an opportunity for us to gain share as well. Long answer to your question, but I wanted to make sure we're clear. But, yeah, absolutely, you know, to the extent our customers are gaining share, that certainly is an opportunity for us to gain share as well.

Got it. That makes sense. And is there any sort of timing expectation around that, or is that still kind of falling inside your expectation and communication of sort of like an improving environment for TPI in 2025 plus?

Yeah, I think it's still a little bit in flux. I mean, we're not counting specifically on that, to be frank. I mean, we are working with our existing customers, evaluating what their needs are. And as we've said, we see 2024 as a continued of the transition with an inflection probably in 2025 is what we're looking at. So we're not focused specifically on the challenges of a single OEM. We're more focused on what we can control and the OEMs we're working for today and how we can help them be successful.

That makes a lot of sense. And one more from me. I was just curious where you are in servicing your own warranty issues. I know you just mentioned that you're taking up that charge just a bit as you're later in that process. So, just curious if you can provide an update. on maybe what was different from your expectations and maybe what's left here as you've taken up that expectation for warranty charges?

Yeah, I think, you know, the further along you get in the process, the more experience you have at dealing with the challenges. I think we've done, what we have left is there's a fair amount of up tower, which tends to be a little more challenging than if the blade is down tower. But I would tell you we've worked very closely with our customer and our customer's customer on developing a very efficient program to get this warranty work behind us over the next couple of quarters, quite frankly. So we will have some work going into 2024. But we've already begun shifting our technicians on the billable work for the end of this year. So we'll see more of that as we get into the early part of next year. We'll have much more billable work, and we'll wind down that warranty work in the first half of next year.

Got it. Very helpful.

We'll take the rest offline. Thank you. Yep.

Thanks, Morgan.

The next question will come from Pavel Molchinov with Raymond James. Please go ahead.

Yeah, thanks for taking the question. So I know you're not giving kind of formal 2024 guidance at this stage, but I think you mentioned that you're not expecting a growth year. So just zooming in on that from the one and a half billion in 2023 total top line, flattish down, what kind of magnitude?

I'd say flattish to slightly down. Okay. Okay. That's clear.

And the trajectory quarter-to-quarter kind of more back-end weighted because 2023 has been quite the opposite. You started higher and ended lower.

I'd say it's probably more backend because of the transitions and startups that we'll have in the first half of the year.

Okay. Absolutely clear. Follow-up question on the preferred. You said that at this stage, per the agreement from two years ago, you will be moving to a cash dividend starting next year. Are you in talks with Oaktree about amending that? In other words, prolonging the payment in kind arrangement?

Yeah, I would tell you we are right in the middle of very constructive discussions with Oaktree about providing us with more flexibility next year.

Let's leave it at that.

Okay. Thank you very much.

Thank you, Pavel.

Again, if you have a question, please press star, then 1. Our next question will come from Jeff Osborne with TD Catlin.

Please go ahead. Mr. Osborne, you may be muted.

Sorry about that. You folks walked through on the call all the cash flow issues that won't repeat themselves next year and putting aside the oak tree. dividend is, can you walk through what the uses of cash will be next year, especially in the first half? I imagine there's some potential capex. Maybe you can give us an update on the Newton facility and then just how we should think about cash burn through the first half of the year in particular when things might be a bit more challenged.

Yeah, I think the first half, to your point, is going to be a period of time when they are going to be a bit more challenged. The good news, what I will tell you, is our customers have been much more amiable to providing us funding to help with those startups and transitions than they have in the past. So we're feeling pretty good about where we're at right now with our plan. I do think that you're probably going to see our low watermark for cash performance happen in the first half as we're going through those transitions. But we are getting subsidized by our customers, so that'll help out a fair amount. We are already this year starting to spend some CapEx dollars. As you saw, a little bit of a tick up this quarter. You'll see that continue next quarter. Probably the first one out of the gate is going to be what we announced last quarter with the Juarez facility, where GE is going to be producing their workhorse blade. We'll be starting up that facility. And then we have a couple of other transitions that will be going on where we're going from shorter blades to longer blades. So this is all good stuff. I mean, for us, you know, we need to go through these in order to get to where we want to go to the two billion plus in sales, you know, as we get to get the full rate. But the first half will be, I think, the low watermark for cash for us just because of those. And it's not just the transitions. You know, it's the slowdown in sales and sales. dollars coming in that you get when you're going through a decommissioning process of the old lines and everything so we're starting that here in the fourth quarter for a handful of lines that will continue into the first quarter and then we'll move into those transitions makes sense and can you give us an update on what the anticipated capex would be for the full year and any comments that you can share on newton would be helpful Yeah, what I will tell you, we're not quite ready to guide what CapEx is going to be at for the full year, but I'll kind of tell you directionally where we think it's going to be. We've historically kind of our OpEx, CapEx bare bones without startups and transitions has generally been about 1% of sales. And what I would tell you is from a startup and transition perspective, we're probably going to be at least that or maybe a little bit more than that as we get into next year, but we're still kind of fine-tuning the timing on some things right now, especially as thinking about the timing of transitions that happen in 25 that may impact our 24 CapEx. We definitely won't be spending anything beyond what we are this year because we're buying the wind turbines in Turkey. But we will have a combinational startup and transition CapEx and just normal OpEx CapEx.

And Jeff, as it relates to Newton, we're still working with our customer on timing for that one. So we do not have that locked down yet as far as exactly when we will start or the blade type in that facility.

And then very quickly, Bill, on the EV comments you made and the thermal barrier light-duty truck, is there any CapEx associated with that? Anything you could share around content per vehicle and when the start of production might be?

Yeah, the CapEx for that is relatively light. Some of it's already been spent. It'll depend on how fast it ramps, quite frankly. If it ramps faster, there will be a little bit more CapEx next year for it. But, you know, relatively small amounts of CapEx to ramp those programs that we've got started here in the fourth quarter.

Perfect. Thank you. Thanks, Jeff.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Bill Siwik for any closing remarks. Please go ahead.

Thank you, Operator, and thank you all again for your time today and continued interest in support of TPI. I look forward to the next quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.