TPI Composites Inc. Q1 2023 Earnings Call
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Speaker 2: I would now like to hand the conference over to your first speaker today, Mr. Christian Eden and best relations. Please go ahead. Thank you, Operator. I would like to welcome everyone to TPI Composites' first quarter 2023 earnings call. We will be making forward-looking statements during this call and their subject to risk 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.
Speaker 2: You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliation of historical non- GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Bill Seihwick, TPI Composites President and CEO .
Speaker 2: The wind turbine blades we produced during 2022 will help reduce CO2 emissions by approximately 410 million metric tons over their expected 20-year operating lifetime. We make progress towards our 2030 goal of carbon neutrality by reducing overall CO2 intensity by 16%. We achieve our annual waste rate reduction goal of 5%. Enhanced our global behavior-based safety program to further reinforce positive safety behaviors at all of our facilities.
Speaker 3: We are asking our shareholders to approve the phase out of our staggered board and eliminate supermajority voting requirements from our charter documents at our annual meeting later this month. During 2023, we plan to make further progress on our ESG goals. For example, we will be expanding our rooftop solar and turkey A, as well as investing in wind turbines, also in turkey A, to power our facilities with renewable energy. With this investment, we expect to be able to reduce our global greenhouse gas emissions by nearly 20 percent while at the same time reducing our operating costs.
Speaker 3: This is a great example of what wind energy can do for companies. Eliminate a volatility of market rates, reduce the cost of energy, and therefore improve financial results, all while reducing greenhouse gas emissions.
Speaker 3: Now for a quick update on our global operations, including our service and automotive businesses. Please turn to slide seven. During the fourth quarter, we announced and recorded material restructuring and impairment charges with respect to closing our China operations and additional headcount reductions in our other manufacturing facilities and corporate functions.
Speaker 3: We expect these actions to result in structural cost savings of approximately $20 million to be realized in 2023 and beyond while continuing to focus on operating efficiencies to drive annual productivity savings of over $20 million per year, which we have consistently achieved over the past three years. We have made significant progress on the restructuring plans in the first quarter. We were able to terminate our lease for young Joe China on terms more favorable than we were planning on and as of March 31st we have no further obligations with respect to the lease. We have also reduced our head count in China.
Speaker 3: to a half out of half dozen people that were carrying out the administrative activities to wind down our legal entity over the balance of this year. We are also in good shape on the other structural actions that we took and are currently at a run rate to generate our targeted savings.
Speaker 3: the completion of a large customer campaign in 2022, and an increase in time spent on non-revenue generating inspection and rework. For the second quarter, we expect service sales to ramp up again, driven by normal seasonality and customer campaigns. We remain focused on driving profitability and expanding our services outside of the US. Things have continued to progress nicely in our automotive business. We expect to be able to move three plus programs from development to production during the year, and therefore expect to have five plus programs in production by year end. These innovative programs are a combination of EV passenger vehicle parts.
Speaker 3: Class Aids, Caps, and Caps structures and commercial delivery vehicles. We continue to explore to strategic alternatives for this business to enable us to scale faster and are encouraged by the initial discussions and expect to have more information to share by the end of Q2 or early Q3.
Speaker 3: As a relates to our supply chain, the situation has been largely unchanged since our last call. And although it continues to be somewhat challenging, it's significantly better than during the last two years. We continue to expect the overall cost of raw materials to trend down compared to 2022, while logistics costs have generally returned to pre-pandemic levels. With our contract structure and shared paying gain approach, we expect to have a net benefit in 23.
Speaker 3: up the expansion of renewable energy and green technologies while building on previous initiatives such as the European Green Deal and Repower EU. Since we last spoke, the EU announced a deal to reach 42.5% renewable energy by 2030. Dedicated areas are to be set up where countries are required to approve new renewable energy installations within eight-
Speaker 3: of when currently stuck and permit in queues. Here in the US, we continue to wait for guidance on key areas, including domestic content, direct pay, the advance manufacturing production credit, and transferability of credits. The latest we've heard is that we may have received guidance on some key remaining aspects as early as by the end of Q2, and others maybe later than that.
Speaker 3: We'll wait and see. While we recognize the challenges the wind industry continues to face in the near term, we remain confident that demand for wind energy will strengthen once the current regulatory uncertainty is resolved, as well as being driven by the continued focus on energy security and independence globally.
Speaker 3: We believe TPI remains in a unique position with our strategically located footprint, along with strong partnerships with our customers and suppliers, to improve profitability in the near to midterm, and to expand our operations and therefore market share, as demand begins to outpace capacity once wind installations begin to accelerate again.
Speaker 3: While the prospect of growing our capacity is exciting, we expect wind revenue, our wind revenue, to eclipse $2 billion yielding a high single-digit adjusted EBITDA margin and pre-cash flow as a percentage of sales in the mid-single digits over the next couple of years, and this is without expanding our existing footprint. Today we're operating 37 lines and have 11 lines of capacity available with...
Speaker 3: spoken for and we are working to finalize the contract for those lines by the end of Q2. We plan to have all of these lines formally under contract by the end of 2023 and in production at some point during 2024. As we exit 2024 and enter 2025, we expect to have at least 44 lines globally that are installed and operational.
Speaker 3: These 44 lines will provide us with approximately 3,600 sets per year or 14 gigawatts of capacity.
Speaker 3: In the IEA's updated net zero by 2050 scenario, wind needs to reach over 400 gigawatts of installation per year with approximately 80% onshore and 20% offshore. Therefore, the market would have to be almost five times larger than it was in 2022. So clearly, 14 gigawatts of capacity will not be sufficient to meet the long-term needs of our customers.
Speaker 3: So strategically growing our global capacity and footprint over the next couple of years is a discussion we are engaged in today with all of our customers. With that, let me turn the call over to Ryan to review our financial results.
Speaker 2: Thanks Bill. Please turn to slide 9. All comparisons discussed today will be on a year over your basis for continuing operations compared to the same period at 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 operations in China at the end of 2022.
Speaker 2: In the first quarter of 2023, net sales were 404.1 million compared to 343.5 million for the same period in 2022, an increase of 17.6%.
Speaker 2: Net sales of wind blades, tooling, and other wind-related sales, which excludes field services and hereafter, I'll refer to as just wind sales, increased by $65.8 million in the first quarter of 2023, or 20.5 percent compared to the same period in 2022. The increase in net sales of wind during the first quarter was primarily due to a 20 percent increase in the number of wind blades produced by the year 2020.
Speaker 4: Here.
Speaker 2: Field service assails decreased by 2.7 million in the first quarter compared to the same period in 2022. The decrease was due to a reduction in technicians deployed on revenue generating projects due to a combination of the climate weather, the completion of a large customer campaign in Kiwana, 2022, and an increase in times spent on non-revenue generating inspection and reward.
Speaker 2: Automotive sales decreased by 2.6 million in the first quarter compared to the same period in 2022. The decrease was primarily due to a reduction in the number of composite bus bodies produced and a decrease in sales of other automotive products, partially offset by an increase in fees associated with minimum volume commitments.
Speaker 4: Net loss attributed to common stockholders was $37.3 million in the first quarter of 2023 compared to a net loss of $29.9 million in the same period in 2022. In the first quarter of 2023, our net loss attributed to common stockholders includes $15.2 million of preferred stock dividends and accretion compared to $14.1 million in the same period in 2022.
Speaker 4: Adjusted EBITDA for the first quarter of 2023 totaled $8.4 million compared to $6.1 million during the same period in 2022, the increase in the adjusted EBITDA was primarily due to earnings and higher sales, lower startup and transition costs, cost reduction initiatives, and net favorable foreign currency fluctuations.
Speaker 4: largely offset by inflation and increased production costs due to a significant change in a customer's inspection criteria requirements. Moving to slide 10, we ended the quarter with $164.2 million of unrestricted cash and cash equivalents and $195.1 million of debt, which includes the net proceeds from the $132.5 million of debt.
Speaker 4: 5.25% green convertible senior notes we issued in the quarter, which Bill talked about earlier.
Speaker 4: We used $87.1 million of free cash flow in the first quarter of 2023 compared to $86.6 million in the same period in 2022. Our use of cash during the quarter was for 37.6 million payments of outstanding payable, severance, and other restructuring activities associated with the shutdown of our China operations.
Speaker 4: In addition, our gross contract assets grew $35.4 million due to an increase in on-build, wind blade production, and timing of advanced payments. The quarter also included $8.1 million in payments related to our Associates Annual Cash Bonus Program and $6.3 million down payment to acquire wind turbines that will provide renewable energy for our manufacturing facilities in Turkey A.
Speaker 4: We also had capital expenditures of $3.3 million during the first quarter. Moving on to slide 11, we are confirming sales in adjusted EBITDA guidance that we issued last quarter. Still a lot to play out over the year, but we are working on a handful of volume changes with our customers. Both increases and increases. They will likely net out sales closer to the bottom end of our guidance range with what we know today.
Speaker 4: In addition, I wanted to provide some color on our adjusted EBITDA guidance for 2023. Similar to sales, there's still a lot of things to play out during the year, in particular our union negotiations with TurkeyAid and foreign currency fluctuations, but we still feel comfortable with our guidance range in the low single digits.
Speaker 4: When we look at second quarter, most of our wage or merit changes kick in, so I expect the second quarter will likely be the low watermark for adjusted EBITDA margin. In the second half of the year, we expect incremental benefits from our productivity improvements and improving raw material and logistics costs to further take shape and offset most of the wage headwinds.
Speaker 4: Moving on to capital expenditures, we are revising our 2023 capital expenditures guidance from 25 million to a range of 40 million to 45 million. The increase in expected capital expenditures is driven by the project we discussed in Turkey to purchase two wind turbines, as well as incremental capital needed to start up our two open manufacturing lines in India.
Speaker 4: As we think about the cadence of our overall cash flows throughout the rest of the year, we do expect our cash balance to remain above flat with the end of Q1. There will be some puts and takes by quarter, but generally it should be relatively flat. Now, as we expect positive cash flows from adjusted EBITDA we generate and the recovery of the elevated levels of in-process contract assets. Offsetting these positive cash flows will be capital expenditures, income tax payments, and interest payments.
Speaker 4: And as Bill alluded to earlier, paint down some higher interest rate lines of credit. I don't expect a lot of other working capital changes over the balance of the year, as our sales are projected to be flattish until the fourth quarter, which we currently expect to be our lowest sales quarter of the year due to seasonally higher holidays, which means less production days, as well as a couple of lines that will begin to prepare for transitions.
Speaker 4: So with that, I'll turn the call back over to Bill. Thanks, Ryan. Please turn to slide 13.
Speaker 3: We remain very bullish on the 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 we are positioned to capitalize on the significant growth the industry expects in the coming years.
Speaker 3: I want to thank all of our TPI associates once again for their commitment, dedication, and loyalty to TPI. And finally, I want to remind you about our upcoming annual stockholders meeting on May 24th, and encourage you to vote in favor of all stockholder proposals, including a couple of key amendments to our charter to enhance our corporate governance practice specifically, proposals four and five.
Speaker 3: which if passed will phase out our staggered board and eliminate supermajority voting requirements from our charter documents. I'll now turn the call back over to the operator and open the call for questions.
Speaker 5: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Your first question comes from Jillian DeMullen-Smith from Bank of America. Please go ahead.
Speaker 6: Hey team, take him to the time. Hope you guys are well.
Speaker 2: You bet. Thanks Julian, good to speak with you. Likewise. Alright, so just digging in here a little bit, you talked about at least 44 lines in the prepared remarks here. Also last quarter you talked about ongoing finalization of some of those negotiations here. Can you talk about what you've been able to crystallize here in terms of visibility against that 44?
Speaker 3: And we don't have necessarily final contracts on all of those lines, Julie, and we have on the majority of signed memorandums of understanding as well as letters of intent. So feel very good with those 44. Now that 44 as we talked about last quarter does not include
Speaker 3: Currently the four lines that we have for Nordex and Matta Morris So if if for some reason we were to keep those lines Clearly we could we could move that 44 to 48 Our intent right now is not to but you know time will tell and then you know Well, you alluded to it and what I alluded to is clearly there's going to be a need for more capacity in the market
Speaker 3: As we get clarity on the IRA, we get more clarity and implementation in the EU, and we start to see installs accelerate. We're looking right now at our existing footprints. Do we expand our existing footprints? Do we look at different geographies?
Speaker 3: And as I mentioned, we're in strategic discussions with each of our customers as to where we can best serve them from a long term perspective, not necessarily in the next year or two, but more from a long term perspective.
Speaker 2: Excellent. Thank you for all that commentary. And if I can get a little bit more financially oriented here, look, I'm trying to read between the lines a little bit of what you're saying in terms of ramping the capex here specifically to be to buy your own wind energy as it turns out. That seems like a statement of confidence in your liquidity to say, look, we're going to invest today to decrease our future operating costs.
Speaker 2: Can you talk a little bit about where you stay today, your confidence in sourcing your commercial sources of financing today and how you think about this, the ramp here.
Speaker 4: This is the best way to describe it. Hey, Julian. Yeah, hey, Julian. This is Ryan. I think with what we did with the convertible node, I think that provides us the ample firepower here as we move forward. I think that one of the things I've been focusing in on is our working capital. Go
Speaker 4: It's okay to go out and get external capital when you need it. I also want to make sure we have an efficient balance sheet. So as we think about moving forward, we're very laser-like focused in on that. I think there's incremental capability to go extract more value out of our balance sheet today. And you saw us raise cap-x, but we're not...
Speaker 4: lowering where our cash balance is at today. And so that's that I think it's a sign of us indicating we feel pretty confident where we're at. And you know where we're at cash wise you know we're in a position today where we think the windows will open and close pretty quick with opportunities with our customers. And you know we do have some firepower on our balance sheet to make sure we're able to take advantage of that. Yeah did you guys quantify how much your working capital requirements have increased overall?
Speaker 4: needs with driving efficiencies through our balance sheet. I think that's the way I put it.
Speaker 2: Okay, all right, well I will leave that there. Thank you guys very much. Best of luck. All right, speak soon. Thanks Julian. Thank you. Your next question comes from Justin Claire from Ross MKM. Please go ahead.
Speaker 7: Thanks for the questions. So I guess first off here, I wanted to dig into the Treasury guidance here. We have gotten some guidance from the Treasury, but we're still awaiting guidance on domestic content, the manufacturing credits.
Speaker 7: I was wondering if you could just talk about whether you're seeing your customers and developers waiting on the guidance before moving projects forward. Is this a significant hurdle to moving projects ahead here? And if we do get that guidance...
Speaker 3: tell you I think there are some developers that are maybe better capitalized and more confident and aware that guidance will ultimately roll out so it hasn't slowed them down that much. I think there are others that are a little bit more
Speaker 3: conservative and waiting to see. I think depending on how some of this guidance turns out may make or break certain projects. So I think it's a combination of things. So clearly there is some hold back. I think also the interest rate environment is creating some hesitation.
Speaker 3: as you start to look at ROIs. I think although, you know, as we mentioned in the prepared remarks, the supply chain, at least from our perspective, is improving fairly significantly and we expect to continue to see an improvement through the year. I think we're still dealing with, you know, inflationary impacts that are creating some challenges to some of the projects.
Speaker 3: With that said when we do get guidance, I absolutely expect to see You know Orders begin to pick up. I don't know if you saw the article today With GE, but GE had a very positive article today on on the US market
Speaker 3: Not withstanding, you know, the IRA and where that's going. Very bullish on the US market and I think we're in that same boat. So I do think once we have, you know, more clear guidance that you will see, certainly we'll see order books start to build. But I do see, you know, we are seeing some more, we're already seeing some of that already, even without the full guidance.
Speaker 7: Okay, great. I appreciate all the color there. And then wanted to ask about, you know, assuming that you do sign contracts for your lines, like let's say in India, you get a contract signed by the end of Q2, what's the timeframe between getting the contract signed and then starting up that facility? And how long does it take?
Speaker 7: to, you know, Mexico might operate.
Speaker 3: Yeah, it's really a function of demand and when our customers want, you know, want the volume. It's not necessarily just, you know, if we're going back and forth on a contract getting a sign versus not, we can start moving forward before we have a, a finally signed contract depending on what the, what the volume needs.
Speaker 3: Iowa will be a little bit trickier just because it's you know, we're gonna have to hire the workforce again And a tight labor market there but it's probably 18 months in Iowa kind of from start to finish and I would say in Mexico and I would say Mexico and India. It's probably half that or a third of that quite frankly
Speaker 5: OK, great. Thanks. I'll pass it on. You bet. Thanks, Justin. Thank you. Your next question comes from James West from Ebercor ISI. Please go ahead.
Speaker 8: Hey, good afternoon, guys. Hey, James, how are you?
Speaker 9: talking about being sold out now for 23 versus, you know, half sold at this time. I think last year was the commentary. Um, how does that translate into your visibility? Um, is this a question of they're sold out now and other customers are sold are getting sold out and you'll see the orders coming in pretty quickly.
Speaker 3: or I mean, I guess what's the time on here to win your memory and turn into contracts? Yeah, well, with G, in particular, we expect those by the end of Q2 to turn those into formal contracts, right? And yeah, I mean, that their visibility is great for our visibility, as you might expect, right? We have a lot of capacity for that.
Speaker 9: in order to replace them with inflation. Are they also, you're talking to you about, you know, increased standardization of blades and trying to make the entire process easier or more efficient? Yeah, I would say James, it's...
Speaker 3: Less I mean they are obviously talking about standardization talking about modularization they're talking about you know slow slowing down NPI new product introduction, but from a standardization It's not as much standardization from a belay perspective across OEMs
Speaker 3: as it is standardization of how we build the blades in each of our factories, their factories, and maybe our competitors' factories, when it's the same blade type. So it's about standardization across a single blade type across all of the manufacturing footprint, whether it's insourced or outsourced, as opposed to standardizing a Siemens blade.
Speaker 3: runs on a vestist turbine. Nothing like that.
Speaker 9: justice term and nothing like that. Okay, okay, got it. Thanks Bill.
Yep, thank you, Jens. Thank you. Your next question comes from Greg Westakowski from Webo Research. Please go ahead. Hey, don't run. I got to know how you doing. No problem here.
Good, how are you? Yeah, doing fine, thanks. First question is, appreciate all the guidance that you guys are giving with so many unknowns out there. You guys have already touched on this, but on the 11 available lines...
I was wondering if you could, if you recap or maybe get a little bit more granular around the cadence of those in terms of startup and the ramp to kind of full operations and when from now to 2025 that could potentially be hitting P&L. Sure. So I will start. Part,ato, stainless steel, aluminum steel stainless steel.
I'll start and if I get it wrong, Ryan will correct me, but on the on India, we're looking at likely starting by the end of this year. Started putting those getting those lines ready to go by the end of this year. So you would see production ramping to full production.
in 2024. So by the end of 24 entering 25 you'd be at full rep. In Iowa right now,
So by the end of 24, entering 25, you'd be at full rep. In Iowa right now, it's probably starting...
starting to to build our team in the back half of this year with startup production probably maybe it's later in the year and start production probably mid 2024 at this point and then hopefully get into a point where we're at.
Almost full ramp speed by the end of 24 going into 25 and then in Mexico It's the the end of this year will start, but it's really that one's pushed to the right just a little bit So it's probably kind of a first quarter ish start a production with being at full ramp by the end of the year, so
You know, I would expect again, depending on volumes by region customer, all things if they were, you know, kind of everything was clicking on all cylinders exiting 24 moving into 25. We'd be pretty much full ramp on all 44 of the lines. Did I get that right? Okay.
Got it. Thank you, Bill. That's very helpful. And then follow up is just on your contracts. I was just wondering if you could talk a little bit more about the process for incorporating inflation into the contracts of labor, cost of materials, commodity, pass-throughs, et cetera. Would you characterize those conversations as being more sympathetic?
Yeah, so there's a lot to unpack there, but I would say in general, I would say there's much more awareness as far as, you know, like inflation and, you know, there's always been a focus on the bill of material. You know, that's 60, 65% of total cause is the bomb.
So that's been where the focus has been and that's where you would see the most shared paying gain. You know, price goes up, we share the price with them, price goes down, they get some savings. But with some of the inflationary environments we've seen on wages and other things, as well as currency fluctuation, there's more attention being paid to that.
By us and by our customers some of the kind of the limits we put on it Probably look pretty good for our customers right now and not as good for us in some certain state and some circumstances So we're working on those as we as we re-opt either extend or renew or entering the new contracts We're looking at some of that as well We're still you know working through the details of the new contracts format
So it's a little early to say exactly how, where we'll wind up with our customers, but clearly both sides are much more attuned to dealing with inflationary environments. We've been in a deflationary environment for so long into the last couple of years that it was usually pretty simple to do, but I'll tell you there's a lot more focus on it and a lot more work being done around there, but a little bit early yet to tell you exactly how that's gonna fall out.
Eric, how are you?
Hey, doing well. Thanks. So this might be tough to answer, but I guess I'll ask it anyway. I know you've got the collaboration agreement with Festus, kind of stepping the...
I guess the relationship up to an extent and you're talking to all your customers about what the future may look like. So I'm just curious, is there a way to kind of describe?
what the interaction with Avastis is compared to some of your other customers and is it possible that you could have some sort of enhanced relationship with those other customers as well.
Yeah, I would tell you our, we have actually really good relationships with all of our customers and they're a little bit different. Each one is a little bit different. I would tell you that we have.
We have, we spend a lot of time with them and over the last year, we've transitioned a lot of what used to be more transactional to a lot more strategic meeting. So higher level, more frequency with our customers talking about not the issue of the day, but about the issue of 2 years, 3 years, 5 years, 10 years down the road.
I mean now where I think, you know, it's been a couple of years as we all know, but I think our customers are beginning to see what the potential is, starting to look, you know, more strategically long-term at what their needs are going to be from a geographic standpoint. And so that's really forcing a lot of these more strategic discussions, which works.
was worse great for both parties. Got it. And so, I mean, basically, to put it differently, I mean, your other customers, this is the relationship is, I mean, it's migrating more towards, you know, kind of what you were talking about in that. And when you sign that agreement, I believe it was you announced that your third cover call-ash.
that that was a big focus. So as you come out of this and you look longer term and you think about what the business looks like, I mean, maybe where do you stand in that, the strides you've made and potentially the impact that has?
Yeah, I think we've made, you know, we've made really good strides over the last several years as you indicated that that has been a focus. You know, I think at our last investor day we talked about a 50% reduction in time and cost to do the transitions right after that COVID happened. So it's been a little bit hard to measure that.
But I feel very confident in where we're at. And instead of having kind of a global team that would go site to site, the focus is now is to really build transition teams at each of our locations, so that we can do multiple transitions in multiple geographies more effectively. And it's not like we have to stack them because we only have one team.
So I would tell you we're building that talent pool, making sure that in each region we have the qualified folks that are that are experienced with the transition. And that will only help to enable us to do more transitions at the same time if that's the case, but also do them more cost effectively. Okay, thanks.
We're building that talent pool, making sure that in each region we have the qualified folks that are experienced with the transition and that will only help to enable us to do more transitions at the same time if that's the case, but also do them more cost effectively. Okay, thanks.
Thank you. Your next question comes from Graham Price from Raymond James. Please go ahead. Hi, good afternoon. Thanks for taking the questions. For the first one, I was just wondering if we could get an update on carbon fiber and epoxy resin costs in particular. I know from your comments it sounds like.
material costs overall should be trending lower throughout the year. So, just wanted to get a little color on that. Yeah, we're in a pretty good position with both carbon fiber as well as epoxy. Indices have come down on epoxy resin over 22, now we're still not at pre-pandemic levels.
but we are better than we were in 2022 and we see some more improvement through the balance of the year. There is adequate capacity in the world today which is helping and as well as with logistics and when I talk about logistics being back to pre-pandemic levels I'm talking about inbound as opposed to outbound but from an inbound logistics standpoint
with the capacity in China, it gives, you know, kind of opens up China again a little bit for us from a raw material sourcing standpoint because logistics costs have come back down. So from that standpoint, a lot of capacity and the pricing is pretty solid and carbon fiber similar. We've seen it now it's still so higher than it was from a capacity standpoint. We had, you know, we had problems last year a little bit with that, but...
capacity seems to be fine this year. It's still elevated in cost for more of a pre-pandemic, and that's primarily because it's such an energy, an intensive process to produce it, and with energy costs where they're at, especially in Europe , that's continuing to weigh on those costs, but overall, and pretty good shape from that standpoint.
Okay, got it. And then for my second one was just wondering about currency exposure in Turkey. Obviously, the lira continues to be basically in a free fall. So I was wondering how that impacts your profitability.
Yeah, so from a foreign currency perspective, I think the Lira, we'd prefer it to be even more of a free fall with the inflation pressures we've had there. I think we talked about this in our last call, that Turkey raised the minimum wage by 54.6%. And certainly that's something we're contending with right now because we're not seeing the same reaction in the Lira in its currency. And just as a reminder, our...
Our functional currency in Turkey is the Euro. And so for us, as the dollar weakens against the Euro, that's actually a good thing for us. And as the Lira weakens against the dollar in the Euro, that's also a good thing as we as we bear manufacturing costs and local labor dollars in the Lira and also production expenses. So, as we bear manufacturing costs and local labor dollars in the Lira, that weakens, that's a good thing for us.
As we look forward we're certainly hoping that the functional, that the currency fluctuations, that they mirror that of what the pressures are seeing inflation are right now. Because our first quarter was impacted. You know, we're already experiencing some of that inflation pressure in the first quarter and didn't have the same reaction with the Lyra. Got it. Got it. I understood. Thank you. Thank you.
Thank you. Thank you once again. If you wish to ask a question, please press star and one on your telephone keypad. We'll post for a moment for any further questions to register.
Thank you. There are no further questions at this time. I would now like to turn the conference back over to Mr. Bill Silik for any closing remarks. Thank you again for your time today as well as your continued interest and support of TPI.
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