TPI Composites, Inc. (NASDAQ:TPIC) Q2 2024 Earnings Call Transcript

TPI Composites, Inc. (NASDAQ:TPIC) Q2 2024 Earnings Call Transcript August 8, 2024

TPI Composites, Inc. misses on earnings expectations. Reported EPS is $-1.9175 EPS, expectations were $-0.69.

Operator: Good afternoon, everyone, and welcome to the TPI Composites Second Quarter 2024 Earnings Conference Call. [Operator Instructions] And now at this time, I would like to turn things over to Jason Wegmann, Investor Relations for TPI Composites. Mr. Wegmann, please go ahead, sir.

Jason Wegmann: Thank you, operator. I would like to welcome everyone to TPI Composites Second Quarter 2024 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.

In addition, please note that our financial statements now report our former automotive business as discontinued operation. In June, we divested the automotive business to Clear Creek Investments, LLC. Accordingly, the historical results of our automotive business have been presented as discontinued operations in our condensed consolidated statements of operations and condensed consolidated balance sheets. As we discuss the year-over-year comparisons, please note, we will refer to continuing operations only. With that, let me turn the call over to Bill Siwek, TPI Composites’ President and CEO.

Bill Siwek: Thanks, Jason. Good afternoon, everyone, and thank you for joining our call. In addition to Jason, I am here with Ryan Miller, our CFO. Please turn to Slide 5. We knew coming into the year that it would be a tale of 2 halves. As we’ve been discussing for some time, the first half of the year would be heavily impacted by start-ups and transitions with the back half benefiting from the exit of the Nordex Matamoros facility, the disposition of our automotive business and increased utilization at our plants as we complete the transitions and start-ups. The year is playing out largely as expected, and we are on track to have a profitable second half of the year after a challenging first half. Sales and adjusted EBITDA were lower than expectations in Q2, due to a couple of factors.

First, the heightened emphasis on quality related to new blade models slowed our start-up and transition time lines at 2 of our facilities impacting our sales by about $20 million in the quarter. However, we do anticipate a recovery of most of this volume in the second half of the year, and set us up nicely to enter 2025 at full speed. Second, Nordex’s unexpectedly canceled purchase orders for the Matamoros facility and requested that we wind down the factory and cease production prior to quarter end. As a result, Q2 revenue and adjusted EBITDA from this plant fell short of our expectations. While Nordex ultimately funded all the severance related to the shutdown early in the third quarter, we were burdened with significantly less volume than expected and the inefficiencies of hastily shutting down a factory, while maintaining our contractual commitments to deliver blades to Nordex.

Q&A Session

The good news is that we now have the losses from this plant in the rearview mirror. The $24.9 million adjusted EBITDA loss in the second quarter included $20.7 million in start-up and transition costs and $21.9 million in losses from the now closed Nordex Matamoros facility. Excluding these amounts, our adjusted EBITDA was nearly 5%. With the losses from the Nordex Matamoros plant and the automotive business behind us, and as lines in start-up and transition reach serial production, and we make up most of the lost volume from the first half of the year, we anticipate at least mid-single-digit adjusted EBITDA margins in Q3 and Q4 as well as positive free cash flow as factory utilization approaches 90%. Please turn to Slide 6. Our blade facilities in India and Türkiye continued to be profitable, delivering 257 blade sets, representing 1.2 gigawatts of capacity during the quarter, while our Mexico plants are beginning to show performance improvement driven by the renewed focus on lean and quality initiatives implemented over the past year.

We expect all regions to be profitable in the second half, including Mexico as the lines in transition and start-up as well as lean and quality initiatives mature. We believe we are truly at a pivotal point in time for TPI and our second half will serve as a great launching point for 2025, where we plan to achieve at least $100 million of adjusted EBITDA and generate free cash flow for the year. Our supply chain continues to operate efficiently with costs remaining steady. Raw material prices have declined year-over-year and are expected to be stable to slightly down as Chinese manufacturing capacity surpasses demand. While logistics expenses have seen a modest increase recently, our management strategies have mitigated any operational or financial impact.

With respect to the wind market, we remain optimistic about the long-term recovery of onshore wind and energy, though we remain cautious about the exact timing for the overall market. The structural foundation for sustained growth in onshore wind is in place and robust, and global demand for clean energy continues to rise, driven by factors such: as the growing power needs for data centers, semiconductor chip manufacturers the adoption of electric vehicles and the electrification of just about everything. Global onshore wind installations, excluding China, are expected to bottom out in 2024, before beginning to accelerate in 2025. Wood Mackenzie forecasts U.S. installations to reach 6 gigawatts in 2024 and nearly 15 gigawatts annually by the end of the decade.

Although there are very promising long-term prospects driven by supportive policies in the U.S. and EU, we expect significant growth within our key markets to likely be pushed to the back half of ’25 or into 2026. Challenges such as high interest rates, inflation, capital constraints, permitting issues, grid access and uncertainties in the U.S. around the upcoming election are hindering certain project timelines. With that said, given the strong position of our primary customers, we do anticipate volume growth for TPI in the U.S. in 2025. This growth will be supported by blade lines that will be in full production throughout the year, including the 4 new lines for GE that are in start-up today, along with being bolstered by the guidance from the U.S. Treasury and IRS on the Inflation Reduction Act domestic content bonus, supporting the competitiveness of our Mexico plants.

Our U.S. growth will be partially offset by a modest decline in demand for our blades in the EU as we work with our customers on future blade models and optimization of our blade footprint to cost effectively serve the EU as market demand and wider Europe recovers. Before I turn it over to Ryan, our financial outlook for the full year remains unchanged with 2024 being a year of transition. With the loss-making operations wrapped up, lines in transition and start-up maturing and operational improvements implemented, we are looking forward to a strong second half of 2024 and putting us on track for our targeted EBITDA of at least $100 million in 2025. With that, I’ll turn the call over to Ryan to review our financial results.

Ryan Miller: Thanks, Bill. Please turn to Slide 8. In the second quarter of 2024, net sales were $309.8 million compared to $374 million for the same period in 2023, a decrease of 17%. Net sales of blade tooling and other wind-related sales decreased $58.4 million or 16.1% to $304.3 million. This decrease is driven by a 28% decrease in the number of wind blades produced due to the number and pace of startups and transitions, expected volume lines based on market activity levels, canceled orders for the Nordex Matamoros facility and unfavorable foreign currency fluctuations. These decreases were partially offset by higher average sales prices of wind blades due to the changes in the mix of wind blade models produced, the start-up of production at one of our previously idled facilities in Juarez, Mexico, and an increase in tooling sales in preparation for manufacturing line start-ups and transitions.

Field Services revenue declined by $5.8 million in the second quarter of 2024 compared to the same period in 2023. This was primarily due to a reduction in technicians deployed to revenue-generating projects due to an increase in time spent on non-revenue generating inspection and repair activities. We expect to transition back to revenue-generating activity in the second half of the year. Adjusted EBITDA for the second quarter of 2024 was a loss of $24.9 million compared to an adjusted EBITDA loss of $33.3 million during the same period in 2023. The decrease was primarily driven by the absence of a $32.7 million warranty charge recorded in the prior year. Favorable foreign currency fluctuations and cost savings initiatives, partially offset by lower sales, higher start-up and transition costs, higher losses from the Nordex Matamoros plant, higher wages and overall inflation.

Moving to Slide 9. We ended the quarter with $102 million of unrestricted cash and cash equivalents and $554 million of net debt. Free cash flow was a negative $44 million in the second quarter of 2024 compared to free cash flow of $6.2 million in the same period in 2023. The net use of cash in the second quarter of 2024 was primarily due to our EBITDA losses, capital expenditures related to the transitions and start-ups, interest and tax payments. While the shutdown of the Nordex Matamoros plant has put some unplanned pressure on our cash resources, we have had much success improving the efficiency of our balance sheet over the past couple of quarters, and we will remain focused on preserving cash and optimizing working capital to ensure we have resources to execute key initiatives moving forward.

A summary of our financial guidance for 2024 can be found on Slide 10. We are reaffirming our full year 2024 guidance but narrowing our adjusted EBITDA guidance to the lower end of the range. This adjustment reflects the higher-than-expected losses from the Nordex Matamoros plant, which was shut down on June 30 of this year as well as some foreign currency headwinds in the Turkish lira compared to expectations of its rate of devaluation at the time we set our plan for the year. We anticipate sales from continuing operations in the range of $1.3 billion to $1.4 billion. We believe we are well positioned to return TPI to profitability in the second half of the year and drive positive free cash flow, particularly in the fourth quarter. As Bill stated earlier, we expect our adjusted EBITDA margin to improve to at least mid-single digits in the second half as we have now shed the losses for both the Nordex Matamoros plant and the automotive business.

In addition, as the lines that we have been in start-up and transition achieved serial production rates, we expect to drive utilization to near 90% over the second half of the year. It is for these reasons we are confident we are on a path to recovery. And finally for the full year, we anticipate capital expenditures of $25 million to $30 million. These investments are driven by our continued focus on achieving our long-term growth targets and restarting our idle lines. With that, I’ll turn the call back over to Bill.

Bill Siwek: Thanks, Ryan. Please turn to Slide 12. The long-term market prospects remain promising with a solid structural foundation in place for sustained onshore growth. We will continue to work with our customers to efficiently and profitably provide the market with high-quality, cost-effective blades. We are confident that we are on the path to profitability given the operational progress we have made over the last several quarters. The process of start-ups and transitions is progressing well, and we are confident in our expected full year financial guidance as we are planning a return to at least mid-single-digit adjusted EBITDA margins and positive cash flow in the second half of 2024. We believe our long-term prospects remain strong and are well positioned to achieve adjusted EBITDA of at least $100 million in 2025.

Finally, I want to extend my gratitude to all our TPI associates for their continued commitment and dedication to TPI and our mission to decarbonize and electrify the world. I’ll now turn it back to the operator to open the call for questions.

Operator: [Operator Instructions] We’ll go first this afternoon to Eric Stine of Craig-Hallum.

Eric Stine: Bill and Ryan, so maybe just on fiscal ’25. So clearly, you’re pretty confident about that $100 million EBITDA level. But I also know your commentary was about uncertainty on timing of a meaningful recovery in wind market. So I’m just trying to kind of square the 2 things up. I mean, do you think $100 million is a realistic goal, without a meaningful recovery? Or is a meaningful recovery needed and this could be more back half loaded?

Bill Siwek: Yes. We wouldn’t put out the $100 million if we weren’t confident we would get there. But with that said, there’s really 2 components here, Eric. Number 1 is the — when I talk about the market, I’m talking about kind of in general, the U.S. market. And then I was pretty specific about TPI’s volumes in 2025. So notwithstanding the fact that we may not see as robust or recovery of the U.S. market in 2025 from a TPI perspective, we are — our volumes will be up year-over-year from ’24 to ’25. And our customers are looking for everything we can deliver. So overall market, probably not recovering as fast or pushing to the right a little bit. From a TPI perspective, we’re full out.

Eric Stine: Okay. That’s great color. Great to hear. And maybe just — can you remind me on the idle facility in Juarez that you’re starting up, is that something that has been discussed, and I’m just spacing on it? Or is that a new development? And how does that figure into your outlook for ’24 and ’25?

Bill Siwek: Yes. No, we announced it, I think, last year. We started up for GE. So it’s a 4-line facility, and we started that early in the year. So we’ve been really in start-up for the first 2 quarters of the year. So it does have a meaningful impact this year and will certainly have a meaningful impact next year.

Operator: We go next now to Mark Strouse of JPMorgan.

Drew Chamberlain: It’s Drew on for Mark. I guess just firstly start with the Iowa facility and what’s the latest there from GE? And what the potential timing could be there? And also just on that, once they give you the go ahead, how long until you can really start ramping volumes there?

Bill Siwek: Yes. So really nothing has changed from last quarter at this point. We’re still probably best case, looking at early 2025 would be my best estimate at this point, still working through some scenarios. And if that were to happen, we’d have to start ramping it relatively soon. I mean, with the tight employment market in the Midwest, especially in Iowa, I think that will be the biggest challenge is hiring the associates that we need to run that facility. So it’s probably a 6-month process to hire and get rolling again.

Drew Chamberlain: Okay. Okay. That’s helpful. And then, I guess, just transitioning — looking at the cash generation comments. I mean it sounds like it’s positive for the second half, but any more detailed commentary on what you think of how the timing looks like that for 3Q versus 4Q? And do we — I’m sorry if I missed this in the prepared remarks, but do you still think 2Q is going to be the low watermark for cash for the year? Or is there any risk to cash coming in lower in the third quarter?

Ryan Miller: Yes. As we look at cash over the balance of the year. I think our fourth quarter is going to be — we’re are going to bring more cash in the fourth quarter than we will the third. I think we’re kind of right now bouncing along the bottom edge of where cash is going to be. I think you’ll continue to see that in Q3, probably at a similar level. And the reason is, is we’re continuing to have some CapEx investments, we’ll liquidate some advanced payments. And then with interest and taxes, probably be kind of a flattish type of quarter in the third quarter with most of our cash that we bring in will happen in the fourth quarter.

Operator: [Operator Instructions] We go next now to Pavel Molchanov at Raymond James.

Pavel Molchanov: You referenced in the press release the fact that unit pricing on the blades was kind of on the high side and that indeed shows up in the top line. Is that a sustainable run rate? Or was there something very kind of specific in Q2 to explain that?

Ryan Miller: Yes, Pavel, we had a pretty big mix impact in the quarter. And so you saw that rate of $208,000 of blade it will come down. The biggest impact is a lot of these new blades are ramping up. They come with a lot higher price. They’re longer, heavier blades that are more expensive. But a couple of dynamics occurred in the quarter. For example, in one of our Juarez facilities where we make the shorter GE blade, we diverted a good share of that workforce to help with the start-up on the longer blade on the GE’s workhorse blade. And so the volumes on those lower-priced blades were down in the second quarter. We will start ramping those back up in a higher percentage of the mix as we move forward. And then a couple of other factories, too, just the timing of some of the shorter versus longer blades impacted mix as well.

So this will probably be the peak of ASPs, and you’ll see that work its way down as some of the shorter blades ramp up in production over the second half of the year.

Pavel Molchanov: We don’t talk a whole lot about the field services business, but obviously, with the lack of EV sales in the future, that will be, I suppose, a little bit more meaningful in the revenue mix. How is that portion of the revenue mix contributing to EBITDA? I guess you don’t really break it out in the financials.

Bill Siwek: Yes. Well, right now, Pavel, we’re still working through the inspection and repair campaign that we started last year. So we’ve had a fairly significant number of our field service techs on that as opposed to revenue-generating work and therefore, has been very minimal contribution to EBITDA. As we get through those campaigns, which you’ll start to see the impact of that in the second half of this year, then you’ll start to see a much more significant impact. The margins are clearly better. in the field service business. And once we get our text back on the revenue-generating work, you’ll start to see that. It’s not — it doesn’t move the needle significantly yet just because from a size perspective, it’s still relatively small. But that’s an area we anticipate investing more in and growing both in the U.S. and in the EU.

Pavel Molchanov: Last question. Offshore wind has been in the headlines of late, I suppose. You guys have never really played in that slice of the pie. Any interest in getting into the offshore segment in on other side of the Atlantic?

Bill Siwek: Yes. I mean there’s — it’s clearly interesting, Pavel. I mean the growth, especially in Europe is fairly significant. It’s a much more mature supply chain there. So I think it’s quite a ways beyond where the U.S. market is today. With that said, is there interest? Yes. Today, not really. But over time, potentially.

Operator: We go next now to Jeff Osborne with TD Cowen.

Jeff Osborne: Bill, just two questions. One is you made a comment in the prepared remarks about a $20 million hit with a greater focus on quality. Was that in post production or preproduction? And did that tie up service staff?

Bill Siwek: No. Nothing to do with the service staff, Jeff. This was just as we’re working with our customers, building the initial blades, working through the design, the unique characteristics of the design and just making sure that we get the process right so that when we do get to serial production, we don’t have any issues with blades escaping the plant. So it was really just slowing things down a little bit from what we would normally do. But nothing to do with the field service stuff. Now these blades won’t have any issues as it relates to field service. It was just slowing down the process, making sure we’ve got it right before we got to serial production.

Jeff Osborne: And just a follow-up on that, have you remediated those problems at those 2 sites so that you’re entering 3Q with heading the ground running? Or is there like an overhang in the third quarter?

Bill Siwek: Yes. We — there was nothing to remediate. We slowed the process down to make sure with our customers that we were comfortable with the serial production quality of the blade. So yes, we feel like we’ve got great processes. We’ve got great collaboration with our customers. And third, we’ll see in the third and fourth quarter, our utilization rates get up close to 90%. So we’ll be in good shape in the back half.

Jeff Osborne: Perfect. And the last one is just — you also made reference in the prepared remarks about Europe and working with your customers on new designs and potentially new — it sounded like new sites. Would that be an expansion of Turkey? Or would you evaluate building a facility in another low-cost country and region there?

Bill Siwek: Yes, I think we’re — the EU is an important market for us, serving it cost effectively is important. Turkey has been very cost effective for a long period of time. But we will continue to look at options, whether they be in Turkey or somewhere else, either in the EU or in wider Europe to continue to support our customers where they need us to be from a total delivered cost standpoint.

Jeff Osborne: And just a follow-up on that. Any sense on what the CapEx obligation for such a facility would be just given the debt that’s due next year?

Bill Siwek: Yes, we don’t have any debt due next year. But other than the Turkey stuff, which is just evergreen revolver stuff. But no, it would depend really, Jeff. It varies by country, whether land costs are very different. Sometimes land is free, sometimes it’s not. So it would vary pretty significantly. But from our perspective, our rule of thumb has always been $6 million to $7 million per line from a CapEx perspective, that’s what it would be. So you can kind of take that times the number of lines, and that’s the CapEx requirement, it would be for us.

Operator: We go next now to Greg Wasikowski at Webber Research.

Gregory Wasikowski: I just wanted to ask this diplomatically as possible. But could you speak to your ongoing relationship with Nordex following the Matamoros exit?

Bill Siwek: Yes. Obviously, that was that was a difficult period for both of us, for both Nordex and TPI, but I’ve had a number of conversations with their CEO since and during. And I think the relationship is fine. I’ll see him again in the next month or 2 in Europe. I do believe we’ll have a good opportunity to participate in their U.S. blade, the new design for the U.S. market. So I would say the relationship notwithstanding the strains of a tough situation like we had in Matamoros is actually in a pretty good place.

Gregory Wasikowski: Got it. Okay. I appreciate the color. And then for the next 2 quick ones, I apologize if I missed it. I just got a couple of balls in the air right now. Can you give us a sense of timing on the field service and kind of getting that back into maybe normalizing it back to normal revenue production and less Q3?

Ryan Miller: I think as we get into what’s kind of the busy season right now in the summer, we’ve already started to see some of the tech migrate over to more revenue producing. So I think you’ll see a more robust third quarter from us. Notwithstanding, we’re having utilized so many technicians on our own internal campaigns. It will take a little bit to build up a backlog of external campaigns to be revenue-producing. So while I think you’ll see improved numbers in Q3, still got a little work to do to build it back up to where it was before and grow beyond that.

Gregory Wasikowski: Okay. Great. That’s good to hear. And then lastly, just from a modeling perspective, it’s always helpful to have a recap of dedicated manufacturing lines and manufacturing lines installed and the cadence to close out this year and into 2025. If you have that handy, that would be great.

Ryan Miller: Yes. Did you want to just go through kind of inventory of all our lines here? I mean, so we’re going to have 34 lines that will be operating at the end of this year throughout the balance of this year. There are — all the lines in Iowa right now are obviously idle. And then we currently have 2 lines in India that have multinat that have been idled and then 2 more lines of capacity in India. But outside of that, right now, all of our lines are filled up. So it’s really Iowa and India where we have capacity that we’ll look to build in, in ’25.

Gregory Wasikowski: Got it. Okay. That’s helpful. What would be — what’s your updated kind of plan for operating lines in 2025, maybe second half of 2025?

Bill Siwek: The second half of 2025, we certainly have plans but we haven’t provided that, and we’re not prepared to provide that just yet.

Operator: We go next now to Justin Clare with ROTH Capital Partners.

Justin Clare: So I just wanted to follow up on a comment you made. So you were saying that really your customers are looking for all the capacity that you can provide into 2025 here. I was wondering if that’s in reference to really U.S. customers in that market? Or does that also include Europe? I’m trying to get a sense for — basically, are you fully booked across the facilities? I know you mentioned you do have open lines in India. But I just want to get a sense for kind of the demand, U.S. versus Europe and whether you have open capacity.

Bill Siwek: Yes. Thanks, Justin, for the question. My comment was being kind of full sold out is U.S.-related. So it’s for the U.S. market. To your point, we do have some capacity available in India. And that is — we’re still working with our customers on what the ultimate volumes required will be next year from our Turkey plants as well as from our India plants. A lot of what we build in India comes to the U.S. as well. So — but that’s — we’re much more certain right now in volumes for the U.S. than we are for EU.

Justin Clare: Got it. Got it. Okay. And then just given the strength of the U.S. market, is it fair to assume that it’s unlikely to see transitions at the facilities that are serving the U.S. next year, given that customers are looking for all the capacity you can get? So a transition would reduce the amount of volume that you can supply. Is that — is that a reasonable expectation?

Bill Siwek: Yes. I’d say that’s reasonable. We will have a couple of lines transitioning late this year that will leak into next year. But again, it’s to get to the right blade model for a customer. But yes, I think in the U.S., we’ll have very few transitions, if any, next year other than those two.

Operator: And gentlemen, it appears we have no further questions this afternoon. Mr. Siwek, I’d like to turn things back to you, sir, for any closing comments.

Bill Siwek: Yes. Again, thank you, everybody, for your time and for the questions, of course, in your continued interest and look forward to our next discussion.

Operator: Thank you, Mr. Siwek. Again, ladies and gentlemen, this will conclude the TPI Composites Second Quarter Earnings Call. Again, thanks so much for joining us, everyone, and we wish you all a great remainder of your day. Goodbye.