Q2 2021 TPI Composites Inc Earnings Call
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Good afternoon, and welcome the TPI Composites second quarter 2021 earnings Conference call. Today's call is being recorded and we've allocated 1 hour for prepared remarks and Q&A at.
At this time I'd like to turn the conference over to Christian Edin Investor Relations for TPI composites. Thank you you may begin.
Thank you operator, I'd like to welcome everyone. The TPI composites, the second quarter 2021 earnings call, we will be making forward looking statements. During this call based on current expectations and assumptions, which are subject to risks and uncertainties actual results could differ materially from our forward looking statements. If any of our key assumptions are incorrect because of other.
Price over Q2 of 2020, and adjusted EBITDA of $17.4 million for a 3.8% of net sales of $14.1 million increase over the Q2 of 2020.
We hire Jerry Levine as President of Transportation, Jerry brings nearly 30 years of experience working with tier 1 suppliers of major manufacturers in the automotive industry share.
<unk> served as vice President product development of Magna International and Executive Vice President and Chief Program Officer of Dura Automotive systems and also served in senior engineering and technical roles at Ford Motor Company for over 15 years.
We announced an expansion of our relationship with Nordics in July 2021, we took over the production of wind blades for <unk> in Matamoros, Mexico. The wind blades are being produced on for of production lines for an initial term of 3 years.
We executed of 2 year contract extension through 2024 with pro Terror to continue the production of composite bus bodies for the electric bus line.
The addition of the Nordics lines and the extension of the pro Tara contract added approximately $460 million of potential future revenue under contract.
We remain focused on operating our business safely, while continuing to mitigate the impacts of COVID-19, and ensuring that we are prepared to deal with continued resurgence as of the virus in any of our global locations. We have and will continue to adapt our operating procedures in order to enable our associates to work safely and continue to meet our customers.
Demand.
Turning to slide 7 on I'll give you a quick update of our global operations as well as market update.
During the second quarter, we continued to operate all of our facility the normal levels and we did not experience any significant production issues from COVID-19, including any material production stoppages.
We continue to evaluate our global of footprint to ensure it is optimized for our customers and on the market.
Along with other EV components. The addition of Gerry Levine as the automotive depth and leadership that we believe we need to take our transportation business to the next level as deep technical operations and commercial experience along with the contacts and relationships. He has developed over his 30 year automotive career will enable us to re.
Refine and refocus our offerings to accelerate our growth in this business.
As we shared in our press release of couple of weeks ago, our supply chain like virtually every other supply chain has been challenged during COVID-19.
<unk> seen increased raw material costs, mainly relating to resin and carbon fiber as well as increased logistics costs.
We are able to pass on the majority and in some cases of 100% of the cost increases to our customers. The portion we are not able to pass on has had a material impact on our margins and we expect that impact to continue through the balance of 2021.
Expectations are that we will begin to see market pricing improving by the end of Q4 of this year as the start of a slow and gradual downward trend as the market returns to balance.
An early indicator of that is that the price of liquid epoxy resin stabilized from June to July and this was after 9 consecutive months of increases that drove a policy of resins of record highs.
As always our supply chain team is hard at work with existing suppliers and alternative suppliers, along with identifying alternative logistics solutions to minimize the impact of increased cost as soon as possible.
Turning to the wind market.
Since our last call the internal revenue service of published guidance that extends the placed in service safe Harbor to 6 years for facilities that began construction in 2016 through 2019 and extends the placed in service safe Harbor to 5 years for facilities that began construction in 2020 and provides taxpayers more lenient standards to.
The requirements to obtain the production tax credit for.
Residents biding on a bipartisan group announced an agreement on the details of the once in a generation investment in the U S infrastructure in total of the deal includes $550 billion in new federal investment in America's infrastructure that will help the U S tackle climate change by making the largest investment in clean energy transmission and <unk>.
Electric vehicle infrastructure and history.
Electrifying thousands of school and transit buses across the country and creating a new grid deployment of authority to build of clean 20, <unk> century electrical grid.
Although the current deal does not include an extension of the production tax credit for any new tax credits for battery storage conservation or transmission for any federal investment in clean energy manufacturing or supply chain or a clean energy mandate. Many believe those elements will be addressed through reconciliation or our larger spending package.
Later this year.
The International Energy Agency has released the roadmap for the global energy sector to reach net zero emissions by 2050. According to IEA wind energy is expected to be the single largest generator of electricity by 2050, making up 35% of total generation and with over 8000 gigawatts installed compared.
To approximately 740 Gigawatts in 2020.
This is more than 10 times increase in installations is a huge opportunity for the wind industry and TPI.
On the path to zero of the IEA expects that by 2030.390, Gigawatts of wind will be installed annually or about 4 times more than the record set in 2020. The next decade is both critical and of great opportunity for TPI and the wind industry.
As we shared with you a couple of weeks ago, we expect decreased demand for our wind blades from our customers. During the remainder of 2021 in particular the fourth quarter. We believe this is short term and due to the continued global renewable energy regulatory and policy uncertainty as well as raw material cost increases.
We believe that general optimism around the potential to extend the U S. PTC on a long term basis is causing developers to reevaluate project timelines.
Anticipation of being able to build projects at higher PTC levels and lower costs. Once the expected extensions are in place and therefore of developers are not purchasing blades of turbines to satisfy current PTC safe Harbor requirements.
Longer term, we believe the future for wind will strengthen significantly given the necessity to decarbonize and electrify to combat climate change. Therefore, we believe the opportunity for us in wind is significant and we will update our long term strategy and targets as we develop better clarity once the uncertainties around policy and legislation are resolved.
Before I turn it over to Brian we remain very focused on the health and safety of our associates, while executing on our operating imperatives and primary ESG goals, which include safety, increasing the diversity of our associates and board, becoming a more inclusive company and driving to become carbon neutral by 2030.
We are pleased to see the improvements from our ESG efforts, including year over year improvements on our ESG scores across the major sustainability Raiders. Finally, we have been working with local authorities at all of our facilities to help our associates become vaccinated, including setting up vaccination drives directly at the facilities and local clinics with the.
Let me turn the call over to Brian.
Thanks for Phil Please turn the slide 11.
All comparisons made today will be on a year over year basis compared to the same period in 2020 for.
For the second quarter ended June 30 of 2021, net sales increased by $85 million or 22, 7% to $458.8 million net sales of wind blades increased by 23%.
The same period in 2020. This decrease was primarily due to the reasons previously described.
Net loss per share with a 1 dollar a for the quarter compared to net loss of of dollars 87 cents.
Per share for the same period in 2020.
Our adjusted EBITDA for Q2 was $17.4 million for 3.8% of net sales with the utilization rate of 82% for the lines installed a quarter and this compares to adjusted EBITDA of $3.3 million or 9% of net sales and utilization of 70% in the same period in 2020.
Moving to slide 12.
We ended the quarter with of $123.1 million of cash and cash equivalents net debt of $114 million and leverage ratio of well below our 2 times target for Q2, we continue to Prioritise capital expenditures that focus on the health and safety of our associates and that will help us achieve our long term goals.
Turning to slide 13.
For 2021 are full year guidance as revenue of between $175 billion and 1.8 billion. This reflects the decrease in demand offset by the additional for Nordics lines that we began production in July 2021.
Adjusted EBITDA of between $70 million and $85 million, we expect our adjusted EBITDA to be impacted primarily by 2 items first approximately 28 million associated with the decreased demand for are wind blades from our customers. During the remainder of 2021 second approximately $20 million due to the increased raw material costs, mainly relating to <unk>.
<unk> and carbon fiber as well as logistic costs, which continue to remain at elevated levels and beyond our and our customers initial expectations. We are forecasting Q3, adjusted EBITDA to be approximately 40% of the full year adjusted EBITDA guidance.
We update of dedicated manufacturing lines to 54, and wind blades sets capacity to 4260 due to the additional for Nordics lines utilization of approximately 80%.
ASP of between 165000 to of 170000. This forecasted increase NASP reflects the increase in raw material costs passed on to our customers non.
Non blade sales of between $115 million on 125 million capex of between $55 million and $65 million startup costs of between $11 million and $13 million. This increase is due to the startup of the facility for Nordics in Matamoros, Mexico.
We're forecasting to incur a total of between 22 and $37 million of restructuring charges associated with our global footprint alignment in 2021, and 2022 with 15 million to 22 million forecasted to be incurred in 2021.
He's open the line for questions.
We will now begin the question and answer session task of the question you May pass the Star then 1 on your Touchtone phone.
Using the speaker phone please pick up your handset before passing on the key.
Withdrawal of your question. Please press Star then too.
At this time, we will pause momentarily tests on par roster.
Our first question today comes from Laura Sanchez with Morgan Stanley. Please go ahead.
Hi, Good afternoon, everyone can you hear me okay.
Hear you just fine Laura Thanks, Hey, Laura first day.
Hi, Thank you for the time Uhm, so I understand that there is uncertainty around the biggest the extension in the U S and the that's impacting volume from 2021 could you. Please comment on what has changed for 2022 in regards to to the wind market dynamics I. I believe you had mentioned previously that 2022 with looking for.
Very strong, but now you expect the market to be of flat in 2022, so any comments there would be very helpful.
[noise], Yeah, a lot of things for the question I I you know I think we did comment on first quarter that volumes looks pretty good for us the early on as it relates to 2022 that has not changed.
I take are those comments about the market being slapped, mostly from comments and discussions with our customers on our customers customers I think we've been pretty consistent with what the bulk of of the market of the rest of the market has talked about 4 of 2022 and potentially of 2023 is being relatively flat <unk>.
Third of 2020, which was a which was the big year.
And then.
Want some of the uncertainty around the long term policy, whether that be on the U S or how it's implemented in the in the E. U has clarified that I think we see some some significant changes in volume.
On the state and just to clarify flat verses 2021 that would be right in that kind of 20.
Oh, Yeah, I'm, sorry, I misspoke, that's correct. Okay. Okay, and then on the dedicated manufacturing lines I see that now you have safety for lines for the end of the year versus 50 in the prior guidance can you help with I'm, just kind of love it and moving pieces I know you'll have 4 lines routine is gonna instead of going away and for lines with Nordics.
<unk> added.
So what's called him that increase.
[noise] yeah. So that's the literally.
A little bit of of technicality here. It is technically 50 for at the end of the period.
And so that would be at the end of the year and then because the the contracts that expire expire on 12.31 at the end of the year.
So there are there are a number of contracts that are expiring on.
At the end of this year, so going into the 2022, we will have fewer than 54 lines under contract.
We don't have a final number as of this as of this point, yet, but it will be less than 54.
Okay understood and and last question if I may the average selling price is going up for the year wondering if this is purely driven by the new lines with nordics or that and a combination of you being able to raise prices Steven supply chain of strength.
No. The primary driver of those raw material input costs going up so that's causing the increase in the ASP just based on how our call contracts operate any idea of portion of it is the nordics lines for the larger piece of the raw material.
Got it. Thank you so much that's all on my end.
Thank you thanks for.
[noise]. The next question will come from Phillip share with Roth Capital Partners. Please go ahead.
Hi, guys. This is gone and then on to the account.
Uhm.
My first question is what the infrastructure Bill and the potential <unk> reconciliation go the would come at the end of the year are you guys doing anything what you're really talking about infrastructure. You know we tend to think about things like roads and bridges and railroads, but I also think true.
To me the buses could be of direct spent you know it's a huge part of I think it's actually the the biggest first of all of the transportation and so is there are you aware of any money or anything of that was flying for could be flag just for you know municipalities or government to purchase buses and.
And has access to the center.
That's true orders yeah, yeah, there's a there's a pretty significant amount of it that was aimed at the transit and school buses and the.
And the bipartisan deal so that and that's outlined in the deal. So there's a fair a fair amount for that from from our staff, that's great news for us and for our customers clearly, but the biggest part of the infrastructure Bill from of when the standpoint is transmission.
And there is upwards of the depending on how you score it anywhere from $60 billion to $70 billion that has been allocated for some <unk> for.
For grid enhancement over over a period of time so we're.
We're pretty excited about the fact that.
Infrastructure does take a.
Transmission takes a front seat here.
Because again, we need to get the electrons to where people are from where it's generated and transmission is key to that.
Absolutely that's that's great. So.
And other question on preparing.
You and the deck you get 460 million between broke here in order to ask for the incremental for the contract for the you know can you give us a sense of the split between the 2 and over what time frame you're contemplating.
No we can't we can't give you the the direct the split between the 2 but the Nordic sales of 3 year deal. The pro Tara deals of 2 year deal 2 year extension.
Alright, and then lastly, just the last question of them or if I can we're tracking through all of the companies that we follow what's going on in terms of shipping and logistics and you know it just occurs to me that you guys or at least I know your customers of the ones who pay for the plate to ship them.
But you know that will impact their level of demand and so on and so forth. So if we're if we're looking at shipping costs and for a generally and trying to you know follow those trends looking at indexes and such.
Is that a good proxy for moving of blade or as boy are are moving blade something meaningful the different where there could be of lag with other free index is or what is generally go with you know container shipment costs yeah bottlenecks.
Yeah very different from a blade standpoint. So there are specialized ships and then there's obviously specialize rail fixtures as well as specialized truck fixtures. So it's really hard to compare it to a container. However, with that said I mean, we are impacted by container.
Pricing as well right as we bring the raw materials from different parts of the world to our manufacturing facilities.
That gets added into the overall cost of the product in and of portion of that passed on to our customer just like the raw material price. It was itself would be so yeah. I mean, if you look at the overall impact.
Logistics of the smaller piece of the of the overall increase that we're seeing this year, but it is meaningful.
As it relates to the raw materials as opposed to blade.
Okay, great. Thank you I'll I'll pass on on thank you.
Yep.
[noise]. Our next question comes from Eric Stein with credit column. Please go ahead.
Hi, everyone jumped on the Lady So I hope I don't force you to repeat anything.
But maybe just on the raw materials can you remind us when for heart of the contracts for set up when they might be the reset based on price and then I know you've kind of got the sure.
Sure.
Set up that you've talked about kind of maybe.
I guess talk about the current situation.
In that context.
By you know, reducing our downside and that's kind of the nature of the of.
The of the contract and the relationship we have with our customers.
Yeah, no that's for sure.
Maybe the last 1 for me just on the the lines in China I know.
To fill those and this is kind of in a question on.
Ongoing for some time, but any traction well first of all distraction and potentially filling those but then secondly true.
Correction with some of the local Oem's in China, I mean is there any interest or any possibility that they might fill some of those ones.
Yeah, we're I mean, we're still actively.
Working those lines if you will.
It's a it's a little bit tougher with the the Chinese Oems from of cost standpoint, we have had many conversations with them in those continue.
Nothing to report as of today, and then with the or other you know with the Western Oems. We're still we're still working on different scenarios with them in different combinations in our facility. So.
No nothing specific to report, but continuing to work at.
Okay. Thank you.
Thank you.
Again, you have a question of the started then 1 started then 1 task for the question.
Our next question today will come from Steven Chiang Karl with Stifel. Please go ahead.
Thanks, Good afternoon of everybody.
2 things for me the the the first thing for Ya you reference your expectations for the.
The market in 2022, and just curious when you think about your business your <unk> your contracts your market position.
Could you kind of mimic the market and and maybe of locks out of that given what's gone on the sheer can you expand margins and of flattish market next year.
Yeah. That's a good question I think in in response to Laura is question earlier about <unk>.
The lines under contract. So we will have fewer of lines under contract next year.
We expect to to have better utilization.
Next year, so even though we expect the relatively flat ear.
We do expect better utilization and with better utilization generally comes better margins all along those lines we have.
We've been working really hard over the last few years on reducing our overheads reducing.
The making more very of more cost of variable then fixed and so a combination of better utilization and continuing to drive costs and lean out of our organization.
Should should begin to pay dividends next year.
Great. Thank you and then.
Just quickly on on the non wait and bleed side, yeah, Yeah pretty sharp fries in the transportation sales sequentially. It looks like that's kind of a seasonal thing or timing thing for the last year of the second quarter was where similar is is there can.
Can you just kind of a recent trend there on the on the on the <unk>.
Went blank side.
And out for.
Of your whole your guidance for just trying to think about how it progressed throughout the year.
Yeah. It is you think about the non Wembley. So that's made up of 1 of the transportation side of the field service side and the some other revenue in there. So all of those are kind of contributing I mean, so you have do sort of some seasonality Whitfield services as we continue to ramp, especially you'll see some of that so that's all going into those numbers right now.
Okay. Thank.
Thanks for maybe maybe just 1 final want it you did talk about the.
The changes in the in Wimbley average selling prices on and with raw materials being a big a big piece of that.
But the underlying trend, they're given blade links et cetera. That's that's true still continue to sort of a trend higher over the next couple of year, just driven by bleed designs of the Ardra Blaze correct.
Yeah, Yeah, a lot lot longer blades more importantly, heavier blades right and then also the content of the blade. So as more blades go to the carbon from pure glass, you'll see an increase in the ASP as well.
Great. Thank you gentlemen.
Yeah.
The next question will come from Tom current what support Research partners. Please go ahead.
[noise] good afternoon.
Hey, Tom I don't say Tom.
Brian when it comes to the measure he'd been taking 2 to create a more resilient flexible supply chain could you give us an update on on localization.
Where are you at now in terms of of of what you've achieved and then what what do you still aspire to do when it comes to that initiative.
Yeah, Hey, Tom This is bill I'll take that 1.
It continues to be there in a very important initiative for us for a whole number of reasons I mean going through Covid us.
Having localized the number of suppliers of the way we had prior to that certainly benefited us during that period.
And we will continue I can't give you a specific number as 2 the percentage that's local versus not.
But I can tell you for key commodities, we're continuing to work on more and more of localization or regionalization.
For the very reasons of security of supply.
As well as price so.
We're going to continue to focus on that.
Can't give you a specific number on that 1 at this point, but suffice it to say that continues to be a priority for our team.
That's fair Thanks, Bill and then when it comes to the the for lines in Juarez that we'll be getting relinquished by S. T. R. A.
At this point just based on your you know current OEM.
The conversations and indications would you expect those the most likely be absorbed by an existing customer or a new 1.
[noise] I would I would.
I would say probably in the existing 1.
Given that we've we've got the top 5 outside of China, I don't see of Chinese OEM coming in there. So I think it's more likely that it is 1 of our existing customers.
Right and you just wanted to see if there was any 1 of <unk> potentially new on the rise of I'm looking to move into the U S.
And then the last 1 for me for for field service Uhm inspecting the repair services.
Could you just update us on what your current customer mixes between turbine Oems and then wind farm owners and operators on whether or not there's any notable changes occurring within that mix.
Yeah, I would say, it's probably 90.10, maybe 80.515 O E M versus.
Set owner.
We're having we continue to have a lot of discussions and it depends on the region quite frankly.
And the U S. It's it's primarily O F O am's.
Mexico might be more asset on our China asset on her to some extent.
So it just it varies by region, but it's still predominantly OEM.
Great. Thank you for taking my questions.
You bet. Thank you much.
Again I'd like to ask the question the stars on 1.
Hard on 1 asked the question.
Our next question today will come from from.
Moment please.
Our next question today will come from Popple motion all with Raymond James. Please go ahead.
Thanks for for taking the question I jumped on late so I apologize it from covered the total ready by.
In the.
In the context.
What's happened with Covid in India, specifically on the last 100 days or so can you give an update on the status of your operations there in the personnel.
Yeah actually we managed to that very wealth of al. Thanks for the question.
It did impact us slightly from a production standpoint.
More so from raw materials availability because of suppliers, but.
Again management very well, we have a significant portion of our of our associates. There are now vaccinated.
And so it did not impact us material in any in any way at this point.
Put the here and across your your global manufacturing footprint. So all all 5 countries are there any operations where they're at.
Capacity constrained.
On.
Either of regulatory basis or due to agreement with with the Union.
Because of the Covid.
Hi, yes back in the context.
Yes, it's the thing yeah no.
No no union constraints on again as you know the word unionized in Turkey, and in Matamoros snow constraints there and.
I will tell you in China.
And this is very recent.
We were on a voluntary shutdown in 1 of our plants in China.
For a number of for a number of reasons it's.
It's likely will be shut down an extra week, there because of what China would call an outbreak. There's like 32, 128 cases and the young Joe City.
So relatively small for the numbers were used to in the us and elsewhere.
But they they tend to shut things down pretty quickly there with their zero tolerance.
So I would expect will be shut down for an additional week unplanned.
But we will not impact the overall volume for the quarter or for the year.
Perfect. Good good to hear thank you very much.
Thank you.
But it's on gentleman the small conclude the our question and answer session.
Like to turn the conference back over the management for any closer on me.
Hi, Thank bass Scuse me. Thank you and thanks, Thanks for everybody for your interest in TPI on we look forward to our next discussion.
Thank you for the <unk>. The conference has now concluded. Thank you for attending today's presentation you may know.
Disconnect.
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