TPI Composites, Inc. (NASDAQ:TPIC) Q3 2023 Earnings Call Transcript

TPI Composites, Inc. (NASDAQ:TPIC) Q3 2023 Earnings Call Transcript November 2, 2023

TPI Composites, Inc. misses on earnings expectations. Reported EPS is $-1.71 EPS, expectations were $-0.62.

Operator: 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.

Jason Wegmann: 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.

Bill Siwek: Thanks, Jason, and good afternoon, everyone, and thank you for joining our call. In addition to Jason, I am 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 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, start-ups 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 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 3 new automotive production programs in the fourth quarter. These programs include large structural panels and a full battery enclosure for 2 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 2 of them being new to TPI. In addition, the products being launched through 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 2 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 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 6 lines in start-up and 4 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 margin. Today, we are operating 37 lines, including the 4 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 start-up 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 will be working through additional start-ups 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 approach $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.

Ryan Miller: 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 conditions from our Asia reporting segment as we shutdown 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 start-ups 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 the customer implemented a blade redesign and a brief labor 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 were partially offset 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 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 utilized in Türkiye 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 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 to significantly reduce 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 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 start-up 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 in 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 loss is 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 technician 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 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 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.

Bill Siwek: 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 through 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 for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And the first question will come from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine: Hi, everyone. Thanks for taking the question. 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 start-ups being pushed out now taking longer? Or maybe just walk through that for us.

Ryan Miller: 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 are going. And just part of that has been what we started to talk about last quarter. We are seeing a slide to the right. We – when we talked last quarter, there were a lot of start-ups and transitions, and we thought we’d be at 39 in ‘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 start-ups is moving around. I’d say, as we think through 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 will grow that throughout with additional start-ups in ‘25. Also, there’ll be some transitions whereby we will bring in longer blades, and there is 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 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 will be exiting ‘25 and we will be on pace to be at that $2 billion plus in sales and high single-digit EBITDA margins.

Eric Stine: Got it. You mean exiting ‘25, you think you’d be in a position to do that?

Ryan Miller: Yes, it will be on a run rate as we exit ‘25 is our current expectations.

Eric Stine: Got it. Okay. And then maybe just sticking with the customer conversations. I mean the quality issues and I know that there – 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. I’m 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?

Bill Siwek: Yes. 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 is nothing different. It’s just we have better information today than we did when we talked last time. And I would say, we believe our conversations with our customers, if it’s a warranty charge, it’s on us. Eric, let’s be clear with that. Now there are times when a blade fails or there is blade issues and it’s a design issue, and then that’s not a warranty issue for us. But if there is a warranty charge that we talked about, then that is on us. It can be complicated by design, but it’s on us.