TPI Composites Inc (TPIC) 2023 Q3 法說會逐字稿

Hello and welcome to the TPI Composites' third-quarter 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to hand the conference over to your first speaker today, Mr. Jason Wegmann 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 Siwek, 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 5. 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 Proterra 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 our liquidity position will enable us to deal with the near-term challenges the industry is facing, and provide us with a 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 6. To summarize our operations for the quarter in the blade business although we continue to work through some challenges in Mexico, our blade facilities in India and Türkiye continue to perform exceptionally well. Globally, we have produced 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 2023 four-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 and 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 or in investment innovation and new manufacturing technologies is 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 US 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 queues, 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 start-up and four lines in transition during 2024, as our customers prepare for a stronger expected demand beginning in 2025, which will impact the 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 margin. 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 Ryan 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 will refer to as just wind sales, increased by $6.4 million in third quarter 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 volumes 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 every blade or disruption in Türkiye in the third quarter of 2022 as we work with the union to resolve inflationary pressures on wages. These higher blade sales are partially offset by lower average sales prices due to the impact of raw material logistic cost reductions on our blade price.

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 produce due to Proterra bankruptcy during the third quarter of 2023. In addition, sales of other automotive products were down due to our customers' supply chain constraints and delays in transitions of new product launches.

Net loss attributable 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 utilize in Türkiye and India to manage working capital. Our debt levels were stable from the end of last quarter.

We had negative free cash flow of $20.8 million in 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 commitments, 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 the end of the contract period on June 30, 2024. We also don't expect to experience another customer bankruptcy charge to impact 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 start-ups 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 to 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 weakened near-term demand.

Second, as we matured our discussions on transitions with two of our customers, we will begin to wind down production of some lines in the fourth quarter to be in the decommissioning process of the lines and to ready ourselves for transitions in 2024. We've also revised our full year guidance for adjusted EBITDA to a loss of about 5%. Our losses, driven by the warranty campaign, the Nordex Matamoros facility losses, the Proterra bankruptcy charge, increased cost of inspections and repairs and the impact of diverting our field service technicians to non-revenue warranty work.

As we look to the fourth quarter, I'm expecting a modest loss as our Nordex 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 inventories 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 sheet. 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 will now turn the call back to the operator to open it up for questions.

(Operator Instructions)

Eric Stine, Craig-Hallum.

Hi, everyone. Thanks for taking the questions. So last call, I know that when you're 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?

Hey, Eric. 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.

When we talked last quarter, 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 where we're at right now, we expect -- 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 start-ups in '25.

Also there will be some transitions whereby we'll bring in longer blades and that -- and there's a few factories where those longer blades consume more space. And so we actually were down a few lines because of that. But I think there's still lots of moving parts. And I'd say we're still in the probably the sixth or seventh inning of a lot of these customer negotiations and discussions and where we're at today is -- we will be exiting '25, and we are on pace to be at that $2 billion-plus in sales and high-single-digit EBITDA margins.

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

Yeah. It will 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 -- the quality issues, and I know it's not something you necessarily dealt with in the past. And it's not 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 how much of this is on TPIC and how much is on the customers?

Hey, Eric, it's Bill. Good to talk to you. When we put -- 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 to it 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 in our conversations with our customers from if it's a warranty charges on on us Eric, let's be clear with that.

Now 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 talked about and that is on us. It can be complicated by design, but it's on us. But the conversations with our customers are -- 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 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, we -- 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.

Yeah. Thank you.

Morgan Reid, Bank of America.

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 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?

Again, 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. So a long answer to your question, but I wanted to make sure we're clear but we absolutely -- 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 towards like an improving environment for TPI in 2025-plus on the demand side?

I think it's still a little bit in flux. 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 for me. I was just curious where you are in servicing your own warranty issues. And 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 is 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 customers' 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 '24, but we've already begun shifting our technicians on the billable work for the back half here 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. I'll keep the rest offline. Thank you.

Thanks, Morgan.

Pavel Molchanov, Raymond James.

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 $1.5 billion in 2023, total top line, flattish? Down? What kind of magnitude?

I'd say, flattish to slightly down.

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 back end 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.

(Operator Instructions)

Jeff Osborne, TD Cowen.

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 Oaktree 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 challenging?

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 a much more amiable to providing us funding to help with those start-ups 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 will help out a fair amount. We are already this year starting to spend some CapEx dollars. 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 the -- what we announced last quarter with the Taurus facility, where GE is going to be producing that workhorse blade will 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, we need to go through these in order to get to where we want to go to the $2 billion-plus in sales as we get to full rate. But the first half will be, I think, at the low watermark for cash for us just because -- and it's not just the transitions, it's the slowdown in sales and 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.

What I will tell you we're not quite ready to guide what CapEx is going to be out 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 barebones without start-ups and transitions is generally been about 1% of sales.

And what I would tell you is from a start-up and transition perspective, we're probably going to be at least that or maybe a little bit more than that on 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 happened in '25 that may impact your '24 CapEx.

I mean, we definitely won't be spending anything beyond what we are this year because we're buying the wind turbines in Türkiye. But we will have a combination of startup and transition CapEx and just normal OpEx CapEx.

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 in 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 pf production might be?

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'll be a little bit more CapEx next year for it. But yeah, 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 Siwek for any closing remarks. Please go ahead.

Thank you, operator, and thank you all again for your time today and continued interest and 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.